Re: payment for giving up employee share options when a company is taken over?

Ronald Raygun wrote:

That is to say, the value of the share options, at any time before they
are exercised, is the difference between what the shares would cost to
buy shares on the open market and what it would cost her to buy them at
the special price, by exercising the option. If the option is withdrawn,
as it has been, she must be compensated by having their value paid to her.


Do you mean to say the value of an option at the time of exercise is the intrinsic value (i.e. the difference between current stock price and agreed price). Prior to exercise a share option is normally worth more than this intrinsic value due to the limited downside.

If the issuer of the option has the right to cancel the option this feature and the calculation of the amount paid would generally be contract specific.

What happens if they have not?

Then (or rather, if the share price has dropped below the special price)
the options are worthless, and withdrawing them requires no compensation.

What is less clear is whether compensation based on present share value
is adequate compensation. What if there is still much of the 10 year
period to run? Had the company not been taken over, the shares might
still have gone on to rise in the future, so the options have at least
a potential value much higher than their present value. Mind you, on
the other hand they might not, and if the company was needing to be
taken over (bailed out), they might not rise, and perhaps present value
is a good compromise.

Another thing which is unclear is why the compensation payment should be
subject to income tax. It seems that it ought instead to fall under the
CGT regime. Presumably she was given the options at some time in the
past, and they would have been subject to income tax at the time (based
on the discount which the special price represented relative to the then
share price). If the options to buy shares at the original special price
were ever exercised, no tax would be due then, but rather CGT would be
due once the shares were sold, based presumably on the gain represented
by the the excess of the disposal price over the original share price
(not special price) at the time the options were acquired (not exercised).

I would have thought that the disposal of the options themselves would
likewise be treated as a capital gain in the value of the options over
the period they were held, from being the excess of acquisition time share
price over special price, to the excess of disposal time share price over
special price, i.e. the entire compensation payment would be the gain.

I'm not saying you are wrong but I seem to remember that there were very specific beneficial tax rules relating to employee share option schemes.
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