Income Tax (Earnings and Pensions) Act 2003 (c. 1)

Part 7 Employment income: share-related income and exemptions

Chapter 10 Priority share allocations

Exemption where offer made to both public and employees

542 Exemption: offer made to public and employees

(1) This section applies if—

(a) there is a genuine offer to the public of shares in a company at a fixed price or by tender,

(b) a director or employee of the company, or of another company or person, is entitled by reason of the office or employment to an allocation of the shares in priority to members of the public, and

(c) conditions A to C are met.

(2) No liability to income tax in respect of earnings arises by virtue of any benefit derived by the director or employee from the entitlement.

(3) Condition A is that the aggregate number of shares subject to the offer that may be allocated as mentioned in subsection (1)(b) (“priority shares”) does not exceed—

(a) if the offer is part of arrangements which include one or more other offers to the public of shares of the same class, either of the limits in subsection (4), or

(b) in any other case, 10% of the shares subject to the offer (including the priority shares).

(4) The limits referred to in subsection (3)(a) are—

(a) 40% of the shares subject to the offer (including the priority shares), and

(b) 10% of all the shares of the class in question that are subject to any of the offers forming part of the arrangements (including the priority shares).

(5) Condition B is that all the persons entitled to an allocation of priority shares are entitled to it on similar terms (see section 546).

(6) Condition C is that those persons are not restricted wholly or mainly to directors or to those whose remuneration exceeds a particular level.

(7) This section has effect subject to section 543 (discount not covered by exemption in this section).

543 Discount not covered by exemption in section 542

(1) This section applies if the total of—

(a) the price payable by the director or employee for the shares of the company allocated to the director or employee under the offer, and

(b) the amount or value of any registrant discount made to the director or employee in respect of the shares,

is less than the fixed price or the lowest price successfully tendered.

(2) Section 542(2) (exemption: offer made to public and employees) does not apply to the benefit (if any) represented by the difference.

Exemption where different offers made to public and employees

544 Exemption: different offers made to public and employees

(1) This section applies if—

(a) there is a genuine offer to the public of a combination of shares in two or more companies at a fixed price or by tender (“the public offer”),

(b) there is at the same time an offer (“the employee offer”) of shares, or of a combination of shares, in one or more, but not all, of those companies—

(i) to directors or employees of any of those companies, or of any other company or person, or

(ii) to those directors or employees and to other persons,

(c) any of those directors or employees is entitled by reason of the office or employment to an allocation of shares under the employee offer in priority to any allocation to members of the public under the public offer, and

(d) conditions A to C are met.

(2) No liability to income tax in respect of earnings arises by virtue of any benefit derived by the director or employee from the entitlement.

(3) Condition A is that for each company whose shares are subject to the employee offer, the aggregate number of shares subject to that offer that may be allocated as mentioned in subsection (1)(c) (“priority shares”) does not exceed—

(a) if the public offer and the employee offer are part of arrangements which include one or more other offers to the public of shares in the company of the same class, either of the limits in subsection (4), or

(b) in any other case, 10% of the shares in the company that are subject to the public offer or the employee offer (including the priority shares).

(4) The limits referred to in subsection (3)(a) are—

(a) 40% of the shares in the company that are subject to the public offer or the employee offer (including the priority shares), and

(b) 10% of all the shares in the company of the class in question that are subject to any of the offers forming part of the arrangements (including the priority shares).

(5) Condition B is that all the persons entitled to an allocation of priority shares are entitled to it on similar terms (see section 546).

(6) Condition C is that those persons are not restricted wholly or mainly to directors or to those whose remuneration exceeds a particular level.

(7) This section has effect subject to section 545 (discount not covered by exemption in this section).

545 Discount not covered by exemption in section 544

(1) This section applies if the total of—

(a) the price payable by the director or employee for the shares of a company allocated to the director or employee under the employee offer, and

(b) the amount or value of any registrant discount made to the director or employee in respect of the shares,

is not the same as, or as near as reasonably practicable to, the appropriate notional price for the shares of the company.

(2) Section 544(2) (exemption: different offers made to public and employees) does not apply to the benefit (if any) represented by the amount by which the appropriate notional price exceeds the total referred to in subsection (1).

(3) The “appropriate notional price” for the shares of a company is—

(a) if subsection (4) applies, the amount given by the formula in subsection (6), and

(b) in any other case, the notional price.

(4) This subsection applies if shares of the company are subject to the public offer and there is a difference between CP and AFP—

(a) CP being the price for the combination of shares subject to the public offer determined by aggregating the notional prices for each one of the shares comprised in the combination, and

(b) AFP being the actual fixed price or (as the case may be) the lowest successfully tendered price for that combination of shares.

(5) The “notional price” for the shares of a company is the price that might reasonably have been expected to be the fixed price for the shares of the company under a separate offer of those shares if—

(a) the shares of the company, and of each of the other companies had, instead of being subject to the public offer and the employee offer, been subject to separate offers to the public in respect of each company at fixed prices, and

(b) those separate offers had been made at the time at which the public offer was in fact made.

(6) The formula referred to in subsection (3)(a) is—

where—

• NP is the notional price for the shares of the company, and

• AFP and CP have the same meanings as in subsection (4).

Supplementary provisions

546 Meaning of being entitled “on similar terms”

(1) This section applies for the purposes of sections 542(5) and 544(5) (condition that entitlements to allocation of priority shares must be on similar terms).

(2) The fact that different provision is made for persons according to—

(a) the levels of their remuneration,

(b) the length of their service, or

(c) similar factors,

does not mean that they are not entitled to an allocation on similar terms.

(3) The fact that the allocations of shares in a company to which non-company employees are entitled are smaller than those to which company employees are entitled does not mean that they are not entitled on similar terms, if conditions A and B are met.

(4) Condition A is that each non-company employee is also entitled by reason of the office or employment and in priority to members of the public, to an allocation of shares in another company or companies which are offered to the public at a fixed price or by tender at the same time as the shares in the company.

(5) Condition B is that in the case of each non-company employee the aggregate value of all the shares included in the allocations to which the non-company employee is entitled is the same, or as nearly the same as is reasonably practicable, as that of the shares in the company included in the entitlement of a comparable company employee.

(6) For the purposes of subsection (5), the value of shares is to be measured by reference to the fixed price or the lowest price successfully tendered.

(7) In this section—

• “company employee”, in relation to a company, means a director or employee of the company, and

• “non-company employee”, in relation to a company, means a director or employee of another company or person.

547 Meaning and amount or value of “registrant discount”

(1) For the purposes of this Chapter there is a “registrant discount” in respect of the shares of a company if conditions A to C are met.

(2) Condition A is that members of the public who comply with such requirements as may be imposed in connection with the offer or, if section 544 applies, the public offer are, or may become, entitled to a discount in respect of the whole or part of the shares of the company allocated to them.

(3) Condition B is that at least 40% of the shares of the company allocated to members of the public are allocated to individuals who are or become entitled to—

(a) the discount, or

(b) some other benefit of similar value for which they may elect as an alternative to the discount.

(4) Directors and employees who are entitled by reason of their office or employment to an allocation of the shares in priority to members of the public are not to be treated as members of the public for the purposes of subsection (3).

(5) Condition C is that subscribing employees are, or may become, entitled to the same discount in respect of the shares of the company as any other members of the public to whom shares of the company are allocated under the offer.

(6) In subsection (5) a “subscribing employee” means a director or employee who—

(a) subscribes for shares—

(i) if section 542 (offer made to public and employees) applies, under the offer as a member of the public, or

(ii) if section 544 (different offers made to public and employees) applies, under the public offer as a member of the public or under the employee offer as a director or employee, and

(b) complies (or, in the case of a requirement to register, is taken under the terms of the offer to comply) with the requirements mentioned in subsection (2).

(7) For the purposes of this Chapter, the “amount or value” of any registrant discount made to a director or employee means—

(a) the amount of any such discount made to the director or employee as is mentioned in subsection (5), or

(b) the value of any such other benefit as is mentioned in subsection (3)(b) which is conferred on the director or employee as an alternative to the discount.

548 Minor definitions

(1) In this Chapter—

• “director” means—

  (a)

  in relation to a company whose affairs are managed by a board of directors or similar body, a member of that body,

  (b)

  in relation to a company whose affairs are managed by a single director or similar person, that director or person, and

  (c)

  in relation to a company whose affairs are managed by the members themselves, a member of the company, and

  includes any person in accordance with whose directions or instructions the directors of the company (as defined in paragraphs (a) to (c)) are accustomed to act and a person who is to be, or has ceased to be, a director (as so defined);

• “employee” includes a person who is to be or has been an employee;

• “shares” includes stock;

• “the employee offer” and “the public offer” have the meanings given by section 544(1).

(2) For the purposes of subsection (1) a person is not to be regarded as a person in accordance with whose directions or instructions the directors of the company are accustomed to act merely because the directors act on advice given by that person in a professional capacity.

(3) References in this Chapter—

(a) to the employment, in relation to an employee, are to the employment of that employee, and

(b) to the office, in relation to a director, are to the office of that director.