Global Stock Options COLOMBIA Brigard & Urrutia Abogados CONTACT INFORMATION: Pilar Lopez Brigard & Urrutia Abogados Calle 70A No. 4-41 Bogota, D.C. Colombia 571. 346 2011 plopezb@bu.com.co To understand the answers given below it is important to first read the survey scenario, which can be accessed by CLICKING HERE>>. 1. Are there any corporate actions that need to be taken by the Committee or the shareholders to establish the plan? The Shareholders must hold an assembly in order to approve the issuance of stock. In accordance with the Code of Commerce, this decision requires a plural majority of the voting stock represented at the relevant shareholders meeting (50%+1). Nonetheless, a higher majority may be established in the by-laws of non listed companies. Furthermore, the Board of Directors must submit the rules regarding the issuance of stock. The ordinary shares shall be placed in accordance with said rules. In addition, pursuant to the Code of Commerce, the total purchase price must be paid by the shareholders within the year following the date of the subscription of the shares. 2. Are there any requirements in your jurisdiction about the composition or authority of the Committee? Pursuant to Colombian Code of Commerce, the Board of Directors should be formed minimum by three principal members and their alternates. The principals and alternates must be elected by the Shareholders Assembly for determined periods but may be freely removed at any time, or reelected by the Shareholders Assembly. The principals and alternates must be elected by the Shareholders Assembly by the Shareholders from a list of candidates, following the electoral quotient system. The Board of Directors shall
validly deliberate with the presence of the majority of its members, and the decisions must be taken by the majority of its members, except as expressly provided otherwise in the bylaws. Nonetheless, in the Board of Directors there cannot be majorities consisting of persons that are married or are blood relatives or in-laws. Finally, the Board of Directors may be summoned by itself, by the manager or by the fiscal auditor at least five (5) business days in advance with respect to the date of the meeting or the term established in the bylaws. 3. What does the Committee have to publicly disclose about its Plan-related decisions and when must those disclosures be made? Pursuant to Article 5.2.4.1.5 of 2555 of 2010, a Colombian issuer must disclose any relevant information that would be taken into account by an investor to buy, keep or sell the issuer s securities. If the Colombian company is only publicly traded on foreign stock markets, pursuant to Article 6.12.1.1.1 of Decree 2555 of 2010, it must comply with the rules of said foreign market. 4. Is a participant subject to taxation: on receipt of the option; on exercise; or otherwise? No income tax liability arises at grant or at exercise of the options for the Participants. Price paid by Participants at exercise will be deemed as the tax basis of the acquired shares. 5. Does the tax treatment vary depending on where the Participant resides or habitually exercises his duties (i.e. outside your jurisdiction)? No, as commented, either if the participant resides or not in Colombia, the grant or exercise of the option will not accrue income tax. 6. Does the tax treatment vary depending on the type of option or specific Plan provisions concerning the option? Yes. Tax treatment would vary if a price is paid for the shares or not, as well as any other provision that regulates the Plan. 7. Is Company X entitled to claim a deduction from (or other reduction of) taxable income with respect to the option and, if so, when and how is this calculated? No. As this option will not be an expense for Company X and no payment will be made to any Participant (Employee) as well, there will not be any deductible expense. 8. Does the tax treatment under 7 vary depending on where the Participant resides or habitually exercises his duties (i.e. outside your jurisdiction?) No.
9. Are there special rules for significant shareholders (for example, more than 10% shareholders of the Company)? Pursuant to Colombian corporate legislation, each shareholder will have one (1) vote for each share owned in a corporation. As a general rule, all decisions of the Shareholders Assembly require a plural majority of the voting stock represented at the relevant shareholders meeting ( 50%+1 ). Consequently, there are no special rules for significant shareholders. Nonetheless, in accordance with article 457 of the Code of Commerce, a corporation is under dissolution cause when 95% or more of the subscribed shares belong to one shareholder. 10. What are the other principal tax considerations, if any, such as withholding for social insurance, employment taxes, unemployment taxes, etc., for Company X or its local subsidiary or branch office in your jurisdiction, and the participant? Please see points 4, 5, 6, 7 and 8 above. 11. What needs to be done, if anything, under your local law so that Participants obtain the favorable tax treatment offered by your jurisdiction? Participants will not be taxed neither on the grant nor on the exercise of the option. 12. What securities law or other regulatory (or exchange) requirements are there, if any, such as: filing requirements; prospectus requirements; offering exemptions; size of offering limitations; and currency requirements? Securities laws Pursuant to securities regulations, an offer of securities is considered to be a public offer in the event that such offer is addressed to one hundred or more named potential investors. In the case of stock options, the Superintendence of Finance has indicated that such a threshold would be determined when the options are exercised. In any event, if the stock option plan were offered to less than one hundred employees in Colombia, the offer would be considered to be a private offer and, in such case the offer will not be subject to registration requirements. Please note that a public offer requires the registration of the underlying security with the National Securities Registry and the prior approval of the Superintendence of Finance. Such registration and approval require the submission of detailed financial, legal and commercial information concerning the issuer. In addition, marketing activities require the delivery to potential investors of a prospectus duly approved by the Superintendence. Foreign exchange regulations Employees do not need prior approval from any government authority to purchase foreign securities. Nonetheless, Colombian residents must comply with requirements of the Official Foreign Exchange Market. Regulations in Colombia make a distinction between two different foreign exchange markets: the formal market so-called Exchange Market, where transactions occur only
through authorized foreign exchange intermediaries, under resolutions issued, from time to time, by the Board of Directors of the Colombian Central Bank. The Exchange Market is strictly controlled and the transactions that take place within the Exchange Market are referred to as Foreign Exchange Transactions. Foreign Exchange Transactions may also take place through off-shore bank accounts, held by Colombian residents with the prior authorization of the Colombian Central Bank. Such accounts are known as compensation accounts. Investment in shares and interest quotas of a foreign company is considered a Foreign Exchange Transaction. On the other hand, there is the Free-Market, where the transactions are not explicitly restricted to the requisites and regulations that apply to the Exchange Market. Within the Free-Market Colombian residents are permitted to open bank accounts at foreign financial institutions, if those accounts are not used in connection with Foreign Exchange Transactions. As a consequence, amounts deposited at said bank accounts are not deemed to be part of the Exchange Market. Considering the above, the remittance of funds from Colombia, by a Colombian resident, in order to acquire the shares of a foreign company could be made though a foreign exchange intermediary. If the transfer of funds is made directly by the employees, a Form No. 4 must be submitted to the foreign exchange intermediary. In this case, compliance with foreign exchange regulations will be the solely responsibility of the employees. The Colombian Central Bank, however, has informally agreed to a mechanism by which the subsidiary in Colombia may transfer the total funds to the bank account of the issuing company through a foreign exchange intermediary. Along with this transfer just one Form No. 4 must be filed before the Central Bank, enclosing a list of the employees who are purchasing the shares. On the other hand, if funds to purchase the shares belong to the Free-Market, there are no filing requirements with the Colombian Central Bank, unless the aggregate employee s financial investment abroad at the end of a calendar year equals or exceeds US$ 500.000. This registration must be made before June 30 after the closing of the calendar year in which the financial investment exceeded the aforementioned amount. In the case that the employee would like to transfer to Colombia any income associated with the holding or disposal of the stock, the funds must be converted into Colombian pesos. For these purposes and depending on the initial registration (if any), a Form No. 4 or a Form No. 5 may have to be submitted concurrently with the receipt of the funds. Considering the above, registration requirements in connection with the repatriation or transfer of funds from abroad must be reviewed on a case by case basis. 13. Is a cashless exercise permissible? It may be permissible. Notwithstanding the above, it is advisable to review if the cashless exercise is permissible on a case-by-case basis.
14. Are there any rules in your jurisdiction that prohibit or discourage a foreign subsidiary of Company X from granting options to acquire shares of common stock of Company X to the subsidiary's executives? There are no rules in Colombia that prohibit a foreign subsidiary of Company X from granting options to acquire shares of common stock of Company X to the subsidiary s executives. Nonetheless, prior authorization of the Board of Directors approved by a majority of its members is required if the managers and members of the Board of Directors of the subsidiary are also officers of Company X. 15. Are the rules addressed in this survey applied differently based on whether the multinational operates in a particular jurisdiction as a branch office or as a domestic subsidiary? If so, what are these differences? Pursuant to the Colombian Code of Commerce, a branch of a foreign company shares the same legal personality of the parent. The branch does not have shareholders as it is an extension of its parent with an assigned capital, defined business purpose, its own officers and statutory auditors. Consequently, the branches in Colombia cannot issue stock considering that they are not independent entities from its parent companies. 16. Do executive employees in other jurisdictions need to be covered by a plan of the subsidiary or a plan separate from your Plan to comply with your jurisdiction's law? The executive employees must comply with the jurisdiction s law of the company that will issue the stock. 17. If known, please comment on the accounting issues which are relevant for this Plan. N/A 18. List any other requirements of importance in your jurisdiction. N/A 19. Severance Risks: Will the value of granted options legally need to be included in severance calculations? Due to the fact that the Plan is not labor in nature, that stock option plans are rarely considered to be part of employment agreements, and that the shares represent a discretionary benefit not to be considered compensation of a continuing or recurring character, or part of the Participant s normal or expected compensation, salary, or other remuneration for any purpose, the values of these shares would not need to be included in severance calculations. The latter does not apply when the Stock option Plans are directly associated with the performance or achievement of goals or targets of the employees, where the cost of the
share would be considered part of the employee s regular salary. If this were the case, there is no certainty that the Colombian Labor Courts would uphold this arrangement in the event that a beneficiary were to challenge the nature of the Plans, arguing that it should be treated as salary. Moreover, if we take into consideration that Colombian Labor Courts, as is the case of other Labor courts within the region, tend to protect the employee s rights and interests over the rights and interests of the employer. 20. Acquired Rights: Will Plan participants become legally entitled to future grants or immediate vesting at termination of employment or service? As explained in the previous answer, under the understanding that the Plan is not labor in nature, and that the shares represents a discretionary benefit not to be considered compensation of a continuing or recurring character, salary, or other remuneration for any purpose, there is minimal exposure to the company that the shares will be considered an acquired right, or become a mandatory part of the employment contract. This exposure may be further minimized by appropriately structuring the wording of the Global Stock Option s Plan. Expressions that may lead to the understanding that benefits under the Plan would be determined according to the contribution of the relevant employee towards the success of a company s results, may expose the local employer to the risk that Colombian Labour Courts interpret that payments under the Plan should be considered part of the employee s beneficiary s salary. As a consequence, to the extent feasible, our recommendation is to avoid expressions such as performance, achievement of business, achievement of goals or targets, or other analogous in connection with the granting of the Plan. If on the other hand, the Stock Option Plans are in fact directly associated with the performance or achievement of goals or targets of the employees (beneficiaries), the cost of the share would unquestionably be considered part of the employee s regular salary. If this were the case, and the employer wanted to suspend the employee from future grants, to avoid any labor claim or lawsuit, we suggest to enter into an amendment to the labor agreement of each employee that will have its remuneration modified, in which the new conditions are clearly established and the employee expressly accepts them as the rule in force. The later, due to the fact that modifications to the salary or compensation specifically, require an express written consent by the employee so as to be valid and legally enforceable. Restraining, modifying or suspending any payment that constitutes salary (i.e. the granting of shares for compliance of goals, as is the case), would unavoidably need the express written approval and acceptance from the employee. Modifications introduced by the employer cannot, adversely affect the general labor conditions and minimum rights. The employee s remuneration is amongst the employees minimum rights. It is important to stress and bear in mind when taking the decision to modify salaries, that Colombian Labor Courts, as is the case of other Labor courts within the Latin American region, tend to protect the employee s rights and interests over the rights and interests of the employer.
21. Data Privacy: Will Company X or the local subsidiary or branch office need to take any additional measures to adhere to local data privacy laws? The legal framework for the collection, administration and transfer of personal data is constituted by, on one hand, the judicial precedents of the Constitutional Court and, on the other, by Law 1266, enacted on December of 2008 (the Financial Data Protection Act or the FDPA ). The FDPA aimed to be the general legal framework applicable to the management of personal information, but after being reviewed by the Constitutional Court (Decision C 1011 of 2008), its scope was reduced to be applicable only to financial, credit, commercial, and services information (and to information of the same characteristics coming from abroad) that is destined to financial risk and credit risk calculation ( Financial Personal Data ). As a general rule, any personal data administrator must comply with the principles set forth by the Constitutional Court and the Privacy Act for the access, management and transfer of personal data. One of the most important principles is the Freedom principle established in the Privacy Act, which establishes that Personal data of a person (individual or legal entity) can only be collected, managed, transferred and disclosed with the free, express and prior consent of the owner of the data subject.