PINSENT MASONS ExSOP TM An Overview William Franklin

ExSOP TM The ExSOP™ is a new form of share plan that Pinsent Masons developed around 5 years ago. We believe that, in appropriate circumstances, the ExSOP™ has clear advantages over conventional share plans. Although Pinsent Masons developed the ExSOP™ concept, the idea has been picked up by other advisers and is being marketed as a “joint-ownership” or “shared-ownership” share plan. We have implemented ExSOP™ for over 15 companies including fully listed companies, 3 AIM companies and unquoted companies. Additionally, ExSOP™ has been implemented for what is one of the UK’s largest (and most high profile) private companies.

ExSOP TM (cont) Shares are acquired jointly with an employees' trust. These are owned jointly, but in unequal proportions, by the trustees (own original value) and the employee (owns the right to any growth in value). The employee therefore owns an interest in the shares from the outset. As the ExSOP™ has a funding cost (the cost of acquiring the shares) the employee’s interest is also reduced by a notional interest cost. The result is that the employee's interest is the right to any growth in value less, say, a 4% p.a. notional interest charge.

ExSOP TM (cont) After a period (say 3 years) the employee can call for the shares held by the trust to be sold. The sale proceeds are then split between the employee and the trust according to their proportional ownership. As the employee is selling his interest in an actual share this is a capital gains disposal and not an income tax event. The interest acquired by the employee at the outset has an initial value on which income tax and NICs (employer and employee) must be paid. The value of this interest should be agreed with HMRC. Depends on circumstances but in practice this has resulted so far in valuations of up to around 5%-10% of the underlying value of the shares.

Advantages ExSOP™ can deliver significant tax benefits for participants compared to conventional share option plans – effective 18% tax (CGT) on growth, as opposed to 41% tax (IT and NICs) plus employers NIC (18% v 49%). Profit and loss charges under IFRS2 should be no different than for traditional share options (there is potential for lower charges, but requires negotiation with auditors). ExSOP™ can have comparable commercial terms to those available under traditional share options (leavers' rights, performance conditions etc).

Advantages (cont) Pinsent Masons' technical analysis has been confirmed by leading Counsel, and HMRC have in relation to one client confirmed the tax position via a COP10 ruling. Pinsent Masons has had confirmation from HMRC that ExSOP™ is not a matter requiring disclosure under the tax avoidance schemes disclosure regime. No special individual tax avoidance disclosure is required by individuals.

Other Considerations As with share options, ExSOP™ delivers no value unless the share price rises. Accordingly, it does not have the capacity of an LTIP (long-term incentive plan) or similar plan to capture the values of shares at grant (unless linked with another plan which delivers the day 1 value but without ExSOP™ tax breaks). ExSOP™ will require all of the award shares to be held in an employees’ trust from the date of "grant". Therefore, ExSOP™ will tie up an amount of capital.

Other Considerations (cont) As the employee will have an interest in the award shares from day 1, consideration should be given to the rights that will attach to the shares (eg voting rights). ExSOP™ is technically complex compared to other arrangements. It involves the use of an employees' trust and a detailed joint ownership agreement between the individual and the trust. Participants will need to understand the potential tax advantage in order to "buy-in“ and risks. ExSOP™ involves paying an amount of income tax at the time an award is made (typically 5%-10% of the value of shares). This will not be refundable even if the ExSOP™ does not deliver value because share price does not rise.

Other Considerations (cont) HMRC are not bound to accept a valuation proposal in any case. Private company and non-LSE listed company valuations can be complex, either because there is no “listing” for the shares and/or other valuation inputs may be difficult to establish. External factors (e.g. movements in valuation inputs) can influence actual valuations achieved and the size of the initial tax charge. As ExSOP™ is not a share option plan, the statutory corporation tax deduction often available for such plans will not be available in relation to the "gain".

Other Jurisdictions? Switzerland  SpainProbably Italy?

Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) and regulated by the Solicitors Regulation Authority. The word 'partner', used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm who has equivalent standing and qualifications. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP's registered office: CityPoint, One Ropemaker Street, London EC2Y 9AH. We use 'Pinsent Masons' to refer to Pinsent Masons LLP and affiliated entities that practise under the name 'Pinsent Masons' or a name that incorporates those words. Reference to 'Pinsent Masons' is to Pinsent Masons LLP and/or one or more of those affiliated entities as the context requires. For important regulatory information please visit: