Transcript Global ESPP Rollouts: Design Pitfalls and Compliance

Global ESPP Rollouts: Design Pitfalls
and Compliance Strategies
SF NASPP
October 7, 2009
Valerie H. Diamond
Agenda
– Plan Design Considerations and Challenges
– Compliance Strategies
– International Grant Materials
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Plan Design Considerations
– Typical Section 423 ESPP:
– Six-month purchase periods and/or offering periods of up to
24 months (often overlapping)
– 1-15% payroll deductions from employee’s compensation
– 15% discount (with or without look-back feature); note 5% off
purchase price safe harbor (no compensatory expense)
– All employees of issuer and participating subsidiaries are eligible
(but part-time/fixed-term employees may be excluded)
– Accumulated payroll deductions not subject to interest and may be
commingled with other corporate funds
– $25,000 limit
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Plan Design Considerations
– Impact of Proposed 423 regs?
– Issued July 29, 2008
– Proposed to apply as of 1/1/10
– Total rewrite of current 423 regulations
– Key issues:
– $25,000 limit
– IRS says $25,000 applies for any calendar year option that was
both outstanding and exercisable
– Statute says only “outstanding” and limits only rate of accrual by
year
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Plan Design Considerations
– Impact of Proposed 423 regs? (cont’d):
– Exclusions of Employees
– Although permissible to exclude a smaller subset of employees
within excludable group (e.g., all employees with less than one
year of service; two is max), must do so in identical manner in
each participating corporation (e.g., parent and subsidiaries)
– Equal Rights and Privileges
– Method of payment (e.g., payroll deductions vs. direct payment)
is a right or privilege
– Changes applicable solely to foreign employees -- no good
unless terms less favorable to comply with foreign laws
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Design Challenges Outside the US
– Compensation Definition
– Be careful of definitions that are US centric (e.g., any pre-tax
contributions made by the participant under section 401(k) or 125
of the Code)
– Give Committee/Board discretion to determine whether item is
included in compensation
– Look out for non-US countries with thirteen month salary and
holiday pay issues
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Design Challenges Outside the US
– Part-time and fixed-term employees
– EU Directive (implemented into local law) requires that such
employees be given pro-rated amount of benefit
– Excluding such employees if they work 20 or fewer hours per week
or less than 5 months a year runs afoul of the EU Directive
– 423 does not necessarily mean that such employees must be
excluded; however, treating part-timers/fixed-termed employees in
the EU differently than other employees raises equal rights and
privileges concerns
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Design Challenges Outside the US
– Payroll Deductions
– In some countries, it is not permitted for employees to contribute
through payroll deductions to purchase foreign securities. They
can contribute by check or wire transfer (e.g., Hong Kong,
Argentina)
– In other countries, accumulated payroll deductions must be held
in a separate bank account (e.g., Australia) and interest must be
paid on the deductions (e.g., Austria, but can waive interest).
– In still other countries, payroll deductions must be held separate
and apart from general corporate funds (e.g., Korea, Taiwan)
Many 423 plans only allow payroll deductions (not other
contributions), do not pay interest and do not segregate amounts
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Design Challenges Outside the US
– Participating Employees of Company and Subsidiaries
– Most plans allow the company to designate which subsidiaries
are eligible to participate in the plan
– If there are employees of a branch location of a designated sub,
those employees must participate (or the designated sub cannot)
– If there are flow through check-the-box entities for US tax
purposes, those entities also must participate
What if it is difficult or costly to includes such employees?
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Plan Design Challenges
– If changes are made to accommodate non-US issues, then the risk
is….
– Violation of equal rights and privileges clause
– Particular concern under new proposed Section 423 regs:
permissible only if foreign employees treated less favorably
than US employees
– Violation of ESPP eligibility requirements (e.g., if not US
corporation for tax purposes)
– Shareholder approval requirement
– Under Section 423
– Under NASDAQ/NYSE rules
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Plan Design Recommendations
– Possible solution: Create omnibus plan
– Allows you to deviate from strict requirements of Section 423
– May avoid reporting requirements under Section 6039
– Designate entities in any country where local law may require changes to
offering as participating in non-423 component
– Only entities participating in 423 plan will have to comply with equal rights
and privileges clause
– May allow you to exclude entities of participating non-US subsidiaries
which otherwise could not be excluded (e.g., branch offices of participating
non-US subsidiaries, check-the-box entities)
– Exclusion not possible if branch or CTB disregarded entity of US issuer
– Shareholder approval?
– Difficulties when employee moves in and out of 423 plan
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Compliance Strategies: Tax
– Taxable event for non-US taxpayers
– Typically at purchase for 423 plan
– Exceptions to tax at purchase: Brazil (sale), Chile (sale, unless
recharge), Colombia (sale, unless recharge), Israel (sale),
Netherlands (if earlier than purchase, when employee can no
longer withdraw from ESPP)
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Compliance Strategies: Tax
– Tax withholding/reporting – You need to know this!
– In many countries, withholding/reporting requirement at taxable
event
– Sometimes depends on recharge arrangement
– In most cases, satisfied by withholding from salary
– Minimum rate requirement if withholding in shares
– Problem: mobile employees
– Allocation of taxable income possible?
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Compliance Strategies: Tax
– Taxable amount outside US – Watch for different
valuation!
– Typically the discount (i.e., difference between the FMV of the
shares at purchase and the purchase price) for 423 plan
– Exceptions: China (taxable income calculated under (favorable)
formula), Greece (may be based on discount at grant)
– Different FMV determination in Australia (?), Malaysia, Italy
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Compliance Strategies: Tax
– Favorable tax treatment (Section 423 treatment not
available to non-US taxpayers)
– Austria (deferral/exclusion, but holding requirement)
– Belgium (undertaking)
– Finland (10% exclusion)
– France (P.E.E., but onerous to set up)
– Ireland/UK (SAYE, but onerous to set up)
– Israel (trustee plan)
– Italy (exclusion but requires 3-year holding period)
– Spain (exclusion but requires 3-year holding period)
– UK (NICs transfer to employee) – favorable to employer
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Compliance Strategies: Tax
– Tax filings/notices
– China: Notice 35 filing
– Malaysia: Form BT/ESOS/2000
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Compliance Strategies: Regulatory Issues
– Securities filings/notices:
– EU prospectus filing if more than 99 employees per member state
and offer value exceeds €2.5 million (except in Spain)
– Japan: Form 6 or Form 7 filing if 50 or more employees and offer
value exceeds Yen 10 million (Form 6) or Yen 100 million (Form 7)
– Australia: Class order exemption filing if more than 20 employees
and offer value exceeds A$ 2 million
– Canada: Self-executing exemption generally available under
reporting issues
– Colombia: Prospectus filing if more than 99 employees (very
onerous)
– Indonesia: Registration requirement if more than 100 employees
worldwide (very onerous)
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Compliance Strategies: Regulatory Issues
– Securities filings/notices (cont’d):
– Israel: Exemption filing if more than 35 employees
– Malaysia: Information Memorandum regardless of number of
employees
– New Zealand: Exemption filing regardless of number of employees
(use of treasury shares may simplify filings)
– Philippines: Exemption filing regardless of number of employees
(onerous)
– Thailand: Securities sales report
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Compliance Strategies: Regulatory Issues
– Other regulatory issues:
– Italy: Financial intermediary requirement regardless of number of
employees
– Denmark: Danish Stock Option Act
– Payroll deduction issues:
– Not permissible (Argentina, Hong Kong)
– Approval requirement (Singapore)
– Express consent/authorization (Mexico, Japan)
– Segregation from corporate funds (Australia, Korea, Taiwan,
Japan)
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Compliance Strategies: Regulatory Issues
– Exchange control issues:
– China: SAFE approval required (very onerous)
– All funds have to be remitted through dedicated account
– All sale proceeds have to be immediately repatriated
– Annual quota for inward/outward remittances
– Argentina: Local entity limited to remitting US$ 2 million/month
(including payroll deductions)
– Brazil: Letter of authorization from employees to enable local entity
to remit payroll deductions to US
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Compliance Strategies: Regulatory Issues
– Exchange control issues (cont’d):
– Korea: PoA from employees to enable local entity to remit funds to
US; remittance must be “confirmed” by local bank
– South Africa: Employees have to obtain tax clearance certificate to
enable local entity to remit funds to US (only valid for up to six
months)
– Vietnam: SBV approval required (unlikely to be obtained for
ESPPs unless force sale restriction)
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Compliance Strategies: Regulatory Issues
– What should you do about compliance?
– Complete cost benefit analysis – be realistic about administrative
limitations
– Know where headcounts or other thresholds trigger filings -- and
avoid
– Identify locations with significant, costly, time-consuming filings
– Institute some rules you (and your company) can live by…
– Don’t offer ESPP if fewer than XX employees in country
– If filing cost more than XX, local company must pay for it
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International Grant Materials
– Omnibus or non-US enrollment form/subscription agreement
– Include non-US disclaimer language intended to mitigate labor law,
data privacy, tax and other issues
– Limit any “US-centric” language
– Country-specific appendices
– Include country-specific terms and conditions
– Include employee notifications (e.g., f/x reporting) – although
usually employer’s issue for outflow of funds
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International Grant Materials
– Consider employee tax disclosures (either free-standing or part of
plan prospectus)
– Consider employee presentations/Q&A’s
– Translations?
– Typically not legally required but may be advisable from HR
perspective (exemption: France’s payroll deductions)
– Problem: may create practice requiring company to translate
future documents
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Questions?
Valerie H. Diamond
Baker & McKenzie LLP
(415) 576-3086
[email protected]
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