Transcript No Slide Title

Global Employee Stock Purchase Plans
2001 Global Equity Compensation Forum
Boston, Massachusetts
October 29, 2001
Edward D. Burmeister
Baker & McKenzie
Two Embarcadero Center, Suite 2400
San Francisco, California 94111
(415) 576-3029
[email protected]
NEW DEVELOPMENTS AFFECTING GLOBAL
STOCK PURCHASE PLANS
• India
– New Exchange Control Law (3/2/01) Permits Stock
Purchase by Employees of up to $20,000 Per Year
(up From $10,000 in Five Years)
• Pakistan
– Liberalization of Exchange Control Laws May
Permit Stock Purchase Plans in Pakistan (Circular
No. 12 Dated September 1, 2001) but Prior
Approval of State Bank of Pakistan Required
NEW DEVELOPMENTS AFFECTING GLOBAL
STOCK PURCHASE PLANS (Con’t)
Russia
– New Law Effective July 6, 2001 Liberalizes
Exchange Control Rules. Permits Transfers of
Foreign Currency Out of Russia and Purchase of
Shares in Non-Russian Companies
• Transfers May Not Exceed $75,000 Per Year
• Payments Must Be Made Through Authorized
Bank
• Tax Authorities Must Be Notified Within 10
Days of Transfer
NEW DEVELOPMENTS AFFECTING GLOBAL
STOCK PURCHASE PLANS (Con’t)
• Thailand
– Liberalization of Exchange Control Laws
– Until Recently, Limit of 5% of Pay
– Recently, We Obtained Approval From Bank of
Thailand for Purchases up to 20% of Pay
• U.K.
– Possible Transfer of Employer NIC Liability to
Employees
GENERAL OBSERVATIONS
• U.S. 423 ESPP Tax Benefits Not Relevant Outside the
U.S., Except With U.S. Expats
• 423 Rules May Prove Overly Restrictive
• Steps to Implement a More Flexible Plan Design
Through Plan Amendment
Employee Stock Purchase Plans (ESPP)
• Employee’s Tax Consequences for ESPP
– Amounts Deducted for Payroll Deduction Are on
“After-Tax Basis”
– Grant - No Tax
– Purchase - No Ordinary Income Tax
– Sale - Ordinary Income Tax Due on Spread and
Capital Gains Tax on Gain If Holding Period Met
(2 Years From Grant and 1 Year From Purchase)
• Company Gets Deduction Only If There Is a
“Disqualifying Disposition” Producing Ordinary
Income for Participant
ESPPs – U.S. Tax Considerations
• Essential Features of ESPP
– Plan Provides Rights Granted Only to Employees
of Employer Corporation or Parent/subsidiary
Corporations
– Plan Approved by Shareholders Within 12 Months
Before or After Adoption
– 5% Shareholders Excluded
– Requires All Employees Are Eligible to Participate,
With Certain Limited Exceptions - Less Than 2
Years Service, Less Than 20 Hours Per Week, Less
Than 5 Months Per Year, & Highly Compensated
(414(q))
ESPPs – U.S. Tax Considerations (Con’t)
• Essential Features of ESPP
– Must Provide “Equal Rights & Privileges” to
Participants
– Plan Must Limit Number of Shares Which Can Be
Issued
– 85% Look Back Discount Formula Allowed
– Maximum Option Term -- 27 Months If Look Back
or 5 Years If Price Determined at Purchase Date
– $25,000 Worth of Shares (FMV at Grant) Can Be
Purchased in Each Calendar Year
– Rights Non-transferable Except on Death
ESPPs – Other Considerations
• U.S. Securities Law Issues - S-8, Plan
Prospectus, Blue Sky
• Company’s By-laws and Other Governing
Corporate Documents
ESPPs – Typical U.S. Design
• Purpose Is to Be Solely 423 Plan
• No Discussion of Type of Shares Used
• Employees of Corporation, Parent and Subsidiaries
Only
• Rights Non-transferable, Except on Death
• Part-time Employees Excluded
• Participation Solely by Payroll Deductions
• Deductions Over Purchase Period, Typically at 1-15%
of Salary Rate, and If Funds Not Withdrawn by
Period End, Automatic Purchase of Shares
ESPPs – Typical U.S. Design
• No Interest on Accumulated Payroll Deductions
• Lesser Of: 85% of FMV at Grant and 85% of
FMV at Purchase
• Purchase Period (3, 6 or 12 Months; Or 24
Months With Intermittent Periods)
• Powers of Board/Committee Limited to U.S.
Considerations
International Tax and Other
Considerations
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Tax Considerations
Social Insurance Contributions
Securities Law Compliance
Exchange Controls
Labor Law Considerations
Banking Law Considerations
Data Privacy Restrictions
Other Considerations -- Electronic Documents,
Retirement Programs, Etc.
ESPPs – International Tax and Social
Insurance Considerations
• A Favorable Tax Regime May Be Available
• Rights to Newly Issued v. Treasury Shares May
Change the Tax Treatment of the Employee And/or
Whether the Local Entity Can Take a Local Tax
Deduction for the Costs of the Plan
• Withholding and Reporting by Issuer And/Or
Employer May Be Required
• Social Insurance Contributions May Be Due From
Local Entity and Employee
ESPPs – International Securities Law
Compliance
• Use of Newly Issued v. Treasury Shares May Minimize
or Eliminate Securities Law Compliance
• Using Certain Offering Materials Which Describe the
Terms and Conditions May Minimize or Avoid
Securities Law Filings
Certain Countries May Require a Separate Bank or
Trust Account Be Established to Hold Payroll
Contributions and Interest Be Paid
ESPPs – International Labor Law
Considerations
•
If Grant Is Clearly From U.S. Issuer, Not Local
Employer, and Not Part of Employee’s
Compensation, It May Avoid Termination
Indemnities and End of Service Benefits
•
EU Directive on Part-time Work (97/81/EC).
Adopted 12/15/97 and Obligatory by 1/20/00
ESPPs – International Labor
Law Considerations (Con’t)
• Maternity Leave May Require Participation to
Continue
Some Countries Guarantee Employees a Minimum
Wage And/Or Restrict the Employer’s Right to Make
Payroll Deductions From Compensation, Except for
Certain Designated Purposes
ESPPs – International Banking Laws
• Certain Banking Laws May Require the Creation of
Separate Bank or Trust Accounts to Hold
Accumulated Payroll Deductions
• There May Also Be Restrictions on the Payment of
Interest in Connection With Such Accounts
ESPPs – International Data Privacy
Restrictions
• EU Directive on Processing of Personal Data
(95/46/EC). Adopted 10/24/95 and Obligatory by
10/25/98
• Other Countries May Also Have Laws - Hong Kong
ESPPs – International Design Features
• Create Omnibus Design - 423 and Non-423 Plan (or
Mirror Plan)
• Board/Committee Permitted to Make Plan
Modifications and Adopt Sub-plans for Grants
Outside U.S.
• Include Provisions for Employees Working at
Affiliated Companies
ESPPs – International Design Features
(Con’t)
• Board/Committee Has Authority To:
– Include Part-time Employees Where Required by
Law
– Allow Participation by Check or Bank Debit
Where Deductions Not Permitted by Law
– Permit Interest on Accumulated Payroll
Deductions and Separate Bank/Trust Account for
Funds Where Required by Law
International Implementation - ESPPs
10 Basic Questions:
– When Is the Plan to Be Offered to Employees?
– Will Participation Start in Every Country on the
Same Day? Or Staggered Entrance? Branches,
Check-the-box Considerations
– What Is the Purchase Period, Discount on Shares,
and Amount Employees Can Contribute?
– What Countries?
– How Many People in Each Country Will Be
Offered the Right to Participate in ESPP? (Canada
by Province; Switzerland by Canton)
International Implementation - ESPPs
10 Basic Questions: (Con’t)
– What Entities Will Be Included and Where Do
They Fall on Organizational Chart?
– Will Company Wire Transfer the Accumulated
Payroll Deductions to U.S. Or Use a Book Entry
System?
– Does the Local Entity Want to Take a Local Tax
Deduction for Plan Expenses?
– Who Will Administer the Plan? Company Itself,
Plan Administrator/Broker, Etc.
– Is There an Automatic Dividend Reinvestment
Program?
Brazil ESPP
• Exchange Controls May Mean Implementation Not
Feasible
• Circular Limitation of US$20,000 Over 12 Months
• Filing Each Time Funds Transferred
Germany ESPP
• Tax Considerations
– Tax at Purchase on the Spread
– No Tax on Sale If Shares Held 12 Months & Other
Conditions Met
– Withholding and Reporting Required
• Social Insurance Contributions
– Due on the Spread at Purchase (Employer and
Employee)
Germany ESPP (Con’t)
• Securities Law Compliance
– None, Unless Listed on German Exchange
• Exchange Controls
– Minor Reporting Requirements
Germany ESPP (Con’t)
• Labor Law Compliance
– Separate Bank Account Holding the Employees’
Accumulated Payroll Deductions Required
– Avoid Entitlement Issues by Stating U.S. Law
Governing Law
– Part-time Workers Must Be Included - Equal
Treatment
– No Discrimination Against Employees on
Maternity Leave - Parental Leave (up to Age 3)
Different
– Consult Works Council Regarding ESPP
Germany ESPP (Con’t)
• Data Privacy Restrictions
– Employee Consent Must Be As Specific As Possible
– Consent Required to Transfer Data Abroad Unless to Fulfill Employment Agreement
Japan ESPP
• Tax Considerations
– Tax on Spread at Purchase - Remuneration Income
– Tax on Sale of Shares
– No Withholding or Reporting Unless “Significant
Involvement” by Subsidiary
• No Social Insurance Contributions Because
No Wages for Labor
Japan ESPP (Con’t)
Securities Law Compliance
• Under 50 People, No Registration Unless Over
¥100,000,000
• Over 50 People:
– Form 6 - ¥10,000,001 - ¥99,999,999
– Form 7 - ¥100,000,000 (3-6 Months; $120,000)
• Compliance - Forms 8 and 10
Japan ESPP (Con’t)
• Exchange Controls
– Unregulated Unless Over ¥100,000,000 in
Transaction
• Labor Law Compliance
– Do Not Describe ESPP in Work Rules to Avoid
Vested Rights
– Kyotei Agreement Between “Representative” and
Company Necessary for Payroll Deductions - Do
Not Need Separate Bank Account
Japan ESPP (Con’t)
• Data Privacy Restrictions
– No Mandatory Laws or Regulations
– Guidelines by Ministry of International Trade Just and Reasonable Administrative Reason
– Written Consent Recommended
Malaysia ESPP
• Tax Considerations
– Tax at Grant on Discount If Amount Known Otherwise at Purchase
– Submit Form to Inland Revenue Board Within 30
Days of Grant
– No Tax at Sale Unless in Business of Buying Shares
– Not Clear If Withholding Required, So Tax Ruling
Might Be Useful
• No Social Insurance Contributions
Malaysia ESPP (Con’t)
• Securities Law Compliance
– Information Memorandum Due Within 7 Days of
Grant and Purchase
• Exchange Controls
– Bank Negara Approvals Required
• Remittance of Funds Over RM10,000
• Remittance Must Be Made in Approved
Currencies
• Must Repatriate Proceeds
Malaysia ESPP (Con’t)
• Labor Law Compliance
– Director-general of Labor Approval of Payroll
Deductions - for Employees Earning Wages Less
Than RM1,500 (US$395) Per Month or Those
Engaged in Manual Labor
• Data Privacy Restrictions
– Employee Consent to Collection, Use and Transfer