2014 Equity Compensation Planning: Key Legal, Tax and Market Considerations in Preparing for 2014 Annual Equity Grants Around the World

Transcription

1 2014 Equity Compensation Planning: Key Legal, Tax and Market Considerations in Preparing for 2014 Annual Equity Grants Around the World Global Equity Services Webinar Series November 21, 2013 Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm.

2 Speakers June Anne Burke Brian Wydajewski

3 MCLE/CPE Credit MCLE credit available in: California Illinois New York code will be read midway through the presentation Texas CPE credit available in Texas. Uniform certificate available for all other states Certificates will be sent to everyone that requested such during the registration process If you are participating over the phone and not via the web, please notify 3

4 Global Equity Matrix App Information on the key compliance issues for equity awards. It covers tax and securities, exchange control, labor and data privacy issues in 50 countries. Available for free on your iphone, ipad or Android smartphone More at

5 Discussion Topics Formulating the Game Plan Recent Legal, Regulatory and Tax Changes Market Practices and Anticipated Trends Best Practices for Annual Grants Questions? 5

6 Formulating the Game Plan

7 GAPI Approach Gather information about contemplated grants Timing: Ideally 2 to 3 months prior to actual grant date Countries/headcount Award type(s), key terms and conditions Approach to award agreements (global vs. U.S./Non-U.S.) Employee communications (materials, mode of communication) Administration and local country involvement Reimbursement vs. no reimbursement Practice Tool: B&M Annual Equity Compensation Grant Questionnaire

8 GAPI Approach Assess contemplated grants from legal, regulatory, tax and administrative perspectives Filings/approvals/notices Unique employee communication materials Required actions by Board/Compensation Committee (consider timing of when materials must be prepared and distributed) Estimated costs KEY: Adjust awards to avoid/minimize issues and costs

9 GAPI Approach Prepare implementation plan and timeline Identify specific tasks and responsible party(ies) Establish due dates Use as the basis for periodic meetings/calls and means for memorializing decisions and actions Implement!!

10 Recent Legal, Regulatory and Tax Changes

11 Australia New Proposed Class Order Relief Companies granting RSUs/SARs to Australian employees typically relied on self-executing exemptions (e.g., 20-in-12 exemption) or Class Order exemption (03/184) to avoid prospectus disclosure requirement. In October 2012, ASIC concluded that RSUs/SARs constituted a derivative; exemptions and Class Orders applicable to stock options do not apply ASIC issued Consultation Paper 218 on November 14, 2013 Comments requested January 31, 2014 ASIC has promised a new Class Order in May 2014 Public and private companies will be able to rely on a new exemption to the securities laws for the offering of options, ESPP, RSUs, SARs, and other award forms In general, Consultation Paper expands relief but imposes some new requirements that issuers are likely to find problematic

12 Australia New Proposed Class Order Relief New requirement that a participant must not receive 25% or more of the benefit/shares for a minimum 12-month period Reduces the 12-month listing requirement applicable to public companies to 3 months For public companies, relief includes awards to employees of joint ventures and other affiliates that are at least 20% owned by issuing company Expanded definition of participants to include certain contractors and casual employees as part of offer of employment (subject to minimum 12- month service requirement) Offers to non-executive directors subject to additional conditions Requirement to prepare an offer document for participants and file a form with ASIC notifying it of an offering subject to the exemption Companies that have obtained specific exemptive relief from the ASIC can continue to rely on this relief (as long as the conditions stated in the relief instrument are met) 12

13 Australia New Proposed Class Order Relief RECOMMENDED ACTION: Until new Class Order is issued, consider the following alternatives: Grant restricted stock in lieu of RSUs (restricted stock falls within exemptions/class Orders) Suspend granting RSUs/SARs until ASIC issues revised policy, and seek order of exemptive relief from ASIC for grants Continue grants of RSUs / SARs in light of other exemptions or risk assessment Stay tuned for further developments 13

14 Brazil Change in Social Security Tax Treatment of Equity Awards? Previously, social security taxes applied to equity awards if the local affiliate in Brazil reimbursed the U.S. parent In two separate cases, an administrative tax court in Brazil held that social security taxes were due on stock option income realized by employees on basis that stock options constitute employment remuneration Cases both addressed Brazilian companies granting directly to employees (vs. U.S. companies granting to employees of local affiliate in Brazil) Scope of rulings uncertain (at least one case is being appealed) Subsequently, the Tribunal Regional Federal (TRF) - da 3a. Região ruled that a local employer was not obligated to collect social security at option exercise RECOMMENDED ACTION: Review reimbursement position on awards Review grant agreements for provisions supporting distinction between U.S. issuer and local employer in Brazil STAY TUNED!

15 China Update on SAFE Approval Requirements Companies that previously obtained SAFE approval are required to obtain a new monitoring code and business registration certificate from the applicable SAFE bureau pursuant to Circular 17 ( Notice on Implementing Information System for Capital Account Items ) Shanghai SAFE requiring annual re-registration New applications are more streamlined and usually faster, but Beijing SAFE focused on past non-compliance increased penalty risk Shanghai SAFE refuses to register cash-settled awards Non-PRC nationals increasing gray area Circular 7 requires inclusion of all domestic individuals All SAFE offices seem to view inclusion of non-prc nationals as optional Beijing SAFE will not allow inclusion unless resident in China for one year RECOMMENDED ACTION: Companies without SAFE approval - tread carefully with respect to prior grants in China; consider suspending grants and share issuances until approval is granted Companies with SAFE approval complete annual re-registration; obtain new monitoring code and business registration certificate

16 European Union Status of Employee Share Plan Exemption under EU Prospectus Directive EU Prospectus Directive was amended in 2010 to expand employee share plan exemption for non-eu issuers with securities listed on non-eu regulated exchanges (NYSE, NASDAQ, etc.), subject to determination that non-eu regulated exchange is equivalent to EU regulated exchanges EU Commission s equivalency determination is stalled and based upon unofficial comments from various securities regulators, likely will not be made until 2015 RECOMMENDED ACTION: Existing Filers - Prepare for continued filing of EU prospectus through early 2015 Review expanded exemptions in various countries for alternative means for avoiding EU prospectus obligations

17 Philippines New SEC Reporting Obligations for New Grantees The Philippines Securities and Exchange Commission ("PSEC") recently informally adopted a new interpretation of the securities exemption under Section 10.2 of the Securities Regulation Code Under the new interpretation, issuers relying on a Section 10.2 exemption from registration must notify the PSEC prior to issuance of shares to the new eligible employees (assumes registration exemption previously obtained) Notification includes providing the PSEC with an HR Certificate Noncompliance may subject the issuer to administrative fines and penalties for issuing securities without an exemption RECOMMENDED ACTION: Existing Filers File notice of new eligible employees and HR Certificate in connection with each annual grant (ensuring filing prior to the issuance of shares) 17

18 Romania Elimination of Securities Law Notification Obligation Newly issued guidance from the Financial Surveillance Authority ( FSA ) eliminates the requirement to notify the FSA of each new offering under an equity incentive plan, provided that: the offer is made to fewer than 100 employees in Romania; the awards are non-transferable; and the issuer's shares are not listed on a Romanian exchange. Although this guidance was company-specific and was not made public, it can be interpreted to apply to grants made by other multinational companies RECOMMENDED ACTION: No action required (Enjoy!) 18

19 United Kingdom Self-Certification for Approved Share Schemes Her Majesty s Revenue and Customs ( HMRC ) is developing a process to enable online registration of new and existing tax favored and non-tax favored employee share plans (expected to take effect April 2014) Once a plan is registered, annual reports will be filed online (mandatory beginning April 2015) HMRC is also working with stakeholders to revise/change the approval process for tax favored plans Currently, advance HMRC approval required Working on a self-certification process whereby companies will be asked to confirm that the scheme meets certain conditions as part of the online registration process RECOMMENDED ACTION: If considering a tax favored plan, evaluate the pros/cons of seeking HMRC approval in advance of introduction of self-certification process 19

20 Gazing into the Crystal Ball: Market Practices and Trends 20

21 2014 Market Practices and Trends: Groundhog Day 2013 Continued use of restricted stock units as predominant form of award (time-based and performance-based) Increase in combination awards options and RSUs Shift to global form of award agreements Continued interest in global ESPPs Continued focus on tax withholding and reporting obligations Increased use of reimbursement/recharge arrangements New legal focus: Data privacy, restrictive covenants 21

22 Best Practices for Annual Grants

23 Best Practice #1 Minimize Risk of Equity Awards Being Characterized as Local Employment Compensation Equity grants are not compensation paid by the recipient s local employer, but special benefit paid by the U.S. parent corporation Equity grants should not be addressed in local employment agreements or offer letters; instead, use side letters Governed by U.S. state law Grants subject to approval of U.S. parent s board of directors and/or compensation committee Recipients are required to execute grant documents No local translation 23

24 Best Practice #2 Avoid U.S.-Centric Award Agreements Award Agreements drafted for U.S. employees lack contractual protections needed for key issues arising in other countries: Vested rights Termination indemnities Consent to personal data collection/processing/transfer Form of award settlement or manner of option exercise Tax withholding Compliance with local law requirements Governing law/choice of venue provisions Certain provisions used for U.S. employees may be problematic outside the U.S. Beneficiary designations Restrictive covenants Clawbacks Tax deferrals 24

25 Best Practice #3 Use Global Forms of Agreement Comprehensive forms of agreement reflecting all common U.S. and non-u.s. terms and conditions Initial education of U.S. employees necessary Specific local law requirements reflected in a countryspecific addendum Enhances transparency to global workforce and eases administrative burdens of multiple award agreements 25

26 Best Practice #4 Ensure Satisfaction of Local Tax Withholding and Reporting Obligations Timing of taxable event in other countries often differs from U.S. treatment (e.g., Australia, Belgium) Common tax treatment in other countries: Options taxation on exercise date on spread Restricted Stock taxation on grant date on FMV of shares RSUs taxation on vesting date on FMV of shares ESPP taxation on purchase date on discount Tax withholding and reporting obligations may vary depending upon: Whether the local employer reimburses the U.S. parent/deduction Reference to awards in employment agreements The level of involvement of the local employer Local tax authorities aggressively are auditing equity awards from tax withholding and reporting perspective Severe penalties for non-compliance 26

27 Best Practice #5 Evaluate Costs vs. Benefits of Tax Preferential Awards Equity awards may be granted to employees in a number of countries with tax preferential treatment to the employees, local employer or both France Israel United Kingdom Legal costs and administrative requirements for establishing and operating such grants should be considered before making such grants Upfront taxes (France) Tracking and holding period requirements Special award agreements and sub-plans Ongoing legal updates 27

28 Best Practice #6 Provide Employees with Tax Disclosures to Avoid Headaches Disclosure obligations under U.S. securities laws require U.S. issuers to provide a summary of local tax treatment of awards Addresses treatment at key dates in lifespan of equity award Updated annually (typically in connection with annual grants) Award agreement also will include provision requiring recipients to comply with personal tax obligations (especially important where the local employer is not subject to tax withholding requirements) 28

29 Best Practice #7 Structure Equity Awards to Avoid Local Securities Law Requirements Key Issue: Is the grant of the equity compensation award an offering of securities subject to local registration and/or prospectus requirements? Securities laws typically based upon whether offer is made to an individual within the country (both local nationals and expats) Local requirements may depend upon number of offerees and/or value of the offering Limiting stock options to cashless exercise or granting RSUs in lieu of options often will avoid local requirements Italy Japan 29

30 Best Practice #8 Consider Impact of Local Exchange Controls on Award Recipients Key Issues: Can local nationals hold shares of a non-local company? Can local nationals remit local currency out of the country or receive foreign currency in the country? Are local nationals subject to repatriation requirements? Exchange controls typically apply to local nationals (expats not necessarily subject to same rules) Award agreement also will include provision requiring repatriation, use of a particular method of exercise (for stock options) Sample Problem Countries: China, India, Ukraine, Vietnam 30

31 Best Practice #9 When Instituting Re-Charge Arrangement, Consider Impact on Local Tax Withholding/Reporting Obligations Companies often will require the local employer to reimburse the U.S. parent for the value of equity awards for purposes of securing a local tax deduction In some countries, the local employer will become subject to income tax and/or social insurance contribution withholding/reporting obligations that otherwise didn t exist in the absence of reimbursement Examples Belgium, Brazil, Colombia, Czech Republic, Indonesia, Mexico, Thailand 31

32 Questions?

33 Online Global Equity Compliance Authored by Baker & McKenzie attorneys and contributing firms Comprehensive tool covering local tax & legal issues in 53 countries (updated quarterly) More than a quick reference, this tool offers detailed information and analysis Tax Consequences for the Employee Grant / Exercise / Purchase / Vesting / Sale Dividends / Equivalents / Dividend Reinvestment Foreign Nationals / Employee Transfer Special Tax Regimes Tax Consequences for the Local Subsidiary Tax Withholding & Reporting Income Tax Withholding & Reporting Requirements Social Insurance 2013 Baker & McKenzie 33

34 Online Global Equity Compliance Post-Grant Compliance Ongoing Income Tax Withholding & Reporting Requirements Ongoing Social Insurance Obligations Ongoing Exchange Control Obligations Ongoing Securities Laws Compliance Issues Other Laws or Restrictions Exchange Controls Securities Laws Restrictions Labor Law Considerations Private Company Language Requirement Additional Issues (Data Privacy, Electronic Communication, Beneficiary Designation, Types of Shares Issued, Type of Local Entity) 2013 Baker & McKenzie 34