HMRC recently confirmed at a conference attended by Macfarlanes LLP that companies may now include malus and clawback provisions in the rules of tax-favoured company share option plans (CSOPs).
This is a reversal in approach by HMRC, which had previously argued that malus and clawback provisions could not be included in the rules of a CSOP. HMRC’s initial argument was that the inclusion of clawback or malus was unacceptable as they were “neither essential nor reasonably incidental” to the purpose of providing benefits for employees and directors in the nature of share options and therefore failed the statutory purpose test. That test was replaced in 2013 with the simpler requirement that the purpose of the CSOP must be “to provide benefits in the form of share options”. However HMRC continued to argue that clawback and malus were unacceptable on the basis that their inclusion is incompatible with the requirement of a clearly stated right to shares. We did not agree with that and welcome their agreement that CSOPs may now be amended to include clawback and/or malus.
This change of approach will be particularly welcome to listed companies, who are required under the Code of Corporate Governance to ensure that the company may recover or withhold, in appropriate circumstances, remuneration paid or payable to executive directors (including in the form of share awards or options). Similarly, financial services companies who are required by their regulatory authorities to include clawback and malus may now include appropriate provisions in their taxfavoured option plans.
Some care will still be required. In particular:
- HMRC has not given details as to the type of clawback and malus provisions which are acceptable. Provisions which operate in a purely mechanical manner should clearly be fine. But HMRC may still challenge provisions which operate on a more discretionary basis.
- Amendments to the rules of a CSOP which disadvantage the holders of existing options are likely to require the consent of option holders (which is unlikely to be forthcoming). Any new provisions which are included will generally operate on the basis that they only impact on options granted after the change to the plan is made.
If your company operates a CSOP, you should consider whether it should be amended to take advantage of this change of approach. If you do not, you can now implement a CSOP while continuing to comply with your obligations under the Code of Corporate Governance and/or to your regulatory authorities under the PRA or FCA remuneration code.