6. EMI share options: the existence or acquisition of an interest in a joint venture
The increasing establishment of ‘joint ventures’ prompts a reminder that care is required when determining if a company qualifies to grant EMI share options, particularly if the company, or a member of the group, has an interest as a party to a 50:50 joint venture. Such a ‘pure JV’, if it counts as a ‘subsidiary’, will not rank as a ‘qualifying subsidiary’ so that the requirement in para 10, Schedule 5, ITEPA 2003 will not be met. A JV company will count as a ‘subsidiary’ if the company whose shares are to be put under option (“the scheme company”), together with any person connected with it, has control of the JV company (per para 10(2), Sch 5, ITEPA 2003). Sub-section 993(7) ITA 2007 provides that “In relation to a company, any two or more persons acting together to secure or exercise control of the company are connected with…one another…”. It is understood that HMRC is of the view that, by reason of this sub-section, a company may be connected with its joint venture partner, and that, if so, the joint venture company is to be treated as a “subsidiary” which, as it is not a “51% subsidiary”, means that the scheme company fails to satisfy the “qualifying subsidiaries requirement”. The question of whether two persons are in fact acting together to secure or exercise control (per ss450 and 451 CTA 2010) will normally be determined by reference to the terms of the JV agreement (see the ‘European Vinyls case’, Steele v EVC International NV (1996 STC 785)).
However, in the author’s opinion, HMRC’s approach is based upon a misreading of ss 993(7) ITA 2007 as that provision is to be applied for the purposes of para 10(2). Sub-section 993(7) ITA does not say : “any two persons who together have control of a company are to be treated as connected with one another”. Rather, it says : “In relation to a company, any two persons acting together to secure control of [that] company, are connected with one another”. In the context of para 10(2), it appears to be clear from this that the company in relation to which any connection (with any other person) is to be established is the scheme company, not the JV company.
So, applying ss 993(7) in relation to the scheme company, any two persons acting together to secure control of the scheme company are to be taken to be connected with one another (if they would not otherwise be connected). In relation (only) to the JV company, the scheme company and the JV partner are not connected: ss 993(7) does not mean that, in relation to the JV company, the scheme company is to be taken to be connected with the JV partner (assuming those persons would not otherwise be so connected). Were that the position, the Parliamentary draftsman would have omitted the subordinate clause which would be otiose.
If the ‘qualifying subsidiaries test’ is failed, no (or no more) EMI options can be granted. However, failing the ‘qualifying subsidiaries’ test by reason of entering into such a joint venture, is not itself a ‘disqualifying event’ in relation to outstanding EMI share options.