Restrictive Covenants and Equity Awards: Match Made in Heaven or Headed for Divorce?

A sizeable number of companies include restrictive covenants in their equity award agreements, such as non-compete, non-solicitation, confidentiality and/or non-disparagement provisions. If a grantee violates the provisions, companies can forfeit the award (if still outstanding at the time of the violation), claw back any shares or proceeds related to the shares (i.e., sale proceeds and dividends) or seek an injunction to cease the employee’s violation of the applicable covenant. The restrictive covenants typically are not tailored by jurisdiction but, rather, of a “one-size-fits-all” variety. As a result, companies should not be surprised to learn that the covenants rarely are enforceable as written, especially the non-compete and non-solicitation covenants.[1]

I think it is fairly well-known that non-competes are generally not enforceable in California, except in a few narrow circumstances (such as a selling shareholder or partnership dissolution). The same cannot be said for other jurisdictions (whether other U.S. states or non-U.S. countries), but it is very unlikely that the “one-size-fits-all” approach will work. Continue reading

Australian Share Plan Reporting Goes Digital

The Australian tax year just ended (on June 30, 2016) and the deadlines for Australian Share Plan Reports are just around the corner! This year, to make things more complicated, the Australian Tax Office (ATO) has made a number of changes to the reporting requirements for both the Employee Share Scheme (ESS) Statements and Annual Reports.In addition to a new online reporting system, the ATO is requesting additional data for both the ESS Annual Report and Statement, including specific information relevant to mobile employees and start-ups. Continue reading

What To Do When Your Board Goes Global

We are seeing an accelerating trend among U.S. companies to add non-U.S. residents to their Board of Directors.  This makes sense: as more and more companies “go global” and expand in ever more countries, their Boards should reflect the global nature of the company.

What takes many companies by surprise, however, is that the tax treatment of cash compensation paid and equity awards granted to the non-U.S. directors can be quite complex.  In addition, for the equity awards, companies will need to consider regulatory restrictions such as securities law requirements and ensure that the grants can fall under an exemption.  Continue reading

Are Arbitration Clauses in Award Agreements Arbitrary?

Most equity plans include a governing law provision that provides that the plan and the awards granted under the plan are governed by the law of the jurisdiction in which the issuer is incorporated.  In addition, we typically recommend that companies include a venue provision in their award agreements providing that any dispute related to the plan or awards has to be litigated in a forum chosen by the issuer.  For US-based issuers, this will usually be a federal or state court in the United States, where courts are more likely to enforce the provisions of the award agreements (which typically favor the issuer).   The hope is that, by including such governing law and venue provisions, companies can defeat lawsuits brought by award recipients outside the United States on the basis that foreign courts (which are more likely to apply employee-friendly local employment laws) do not have jurisdiction.  It is questionable if this argument always works (in fact, a UK court recently ruled that UK courts had jurisdiction despite a Massachusetts governing law and venue provision in the award agreement), but such venue provisions may at least have a deterrent effect in some cases. Continue reading

Israeli Tax Nightmare?

The Court Case

In December 2015, the Tel Aviv District Court issued a ruling (the “Kontera decision”) that could have significant implications for companies that have a cost-plus structure in Israel and grant equity awards to employees of the Israeli entity.  Under a cost-plus transfer pricing method, the parent company (or another entity in the company group) compensates the local entity with a fee that equals its direct and indirect costs related to the service provided by the local entity (the “cost base”) plus a mark-up (usually, a percentage of the cost base).  The total fee  is treated as taxable income to the local entity.  It is therefore critical that all expenses that comprise the cost base are deductible expenses for local tax purposes.  If they are, then the taxable income will equal only the amount of the “plus.”

In most countries, companies can determine the amount of their intercompany service fees under the cost-plus approach without including the “cost” of equity awards in the cost base.  This is based on the argument that,  absent a recharge payment by the local entity, there is no actual cost incurred by the local entity.  In this case, the amount of the “plus” is minimized and it is less critical to ensure that the amount of the notional equity compensation “cost” is a locally deductible expense.

However, the Tel Aviv District court rejected this argument in the Kontera decision: in a case where the Israeli entity was being compensated under the cost-plus method, the court ruled that the expense related to the grant of options to employees of the entity had to be included in the cost base.  The “cost” to be included was equal to the accounting expense of the options, not the value of the shares issued to employees (minus the exercise price paid by employees). Continue reading

(Leave of) Absence Makes the Heart Grow Fonder?

It is not uncommon for an equity plan or a leave of absence policy to provide that vesting of awards will be suspended during any unpaid leave of absence.   The intent is clear: companies do not want their employees to continue to vest in and earn awards if they are not rendering services (e.g., because they are on a sabbatical).  However, these types of provisions can be problematic.

Is Suspension Legal and Administratively Feasible?

First, by suspending vesting during an unpaid leave of absence, companies are assuming that such leaves are not protected by law.  (Often, the provision goes on to provide that vesting during paid leaves will also be suspended, but only to the extent such leaves are not protected by law or by contract.)  However, there may also be unpaid leaves outside the U.S. during which suspension will not be permissible.   The provision also raises the question of what is considered an unpaid leave.  Is it a leave during which the company does not pay the employee, even if the employee is paid by a government agency (for at least a portion of his/her regular salary)?  If the employee is paid by the government (as may be the case in some countries for employees on maternity or parental leaves), it will be quite common for the leave to be protected under local law. Continue reading

New Data Privacy Turmoil?

As has been widely reported (see Baker & McKenzie client alert), the European Court of Justice (ECJ) invalidated the EU/US Safe Harbor Program which allowed transfers of personal data of EU/EEA residents to U.S. companies that registered under the program.  Generally, such transfers are allowed only if a permissible ground exists, and the Safe Harbor Program was a convenient ground for many U.S. companies doing business in the EU/EEA.  By invalidating the program, these companies are now forced to rely on other grounds, such as the data subject’s express consent or Model Agreements between the transferring and receiving entity.

What Does This Mean for Equity Award Administration?

In the context of equity awards, U.S. companies granting awards to employees in the EU/EEA have to collect, process and transfer the employees’ personal data (i.e., information by which an employee can be identified) to administer their participation in the plan.  Usually, the equity award database is maintained in the U.S., so the data has to be transferred to the U.S.  In addition, the data is often shared with third-party providers (e.g., stock plan brokers) which also maintain databases in the U.S.  Continue reading

Understanding the New Tax Rules for Options in Australia

As we reported in our July 2, 2015 client alert, the new Australian share plan legislation received Royal Assent on June 30, 2015 and applies to all equity awards granted on or after July 1, 2015.  Under the new tax regime, stock options are generally taxed at exercise only (not at vesting).

In this post, I want to explore the practical implications of the new legislation for most companies and examine the exceptions to the rule.

Grant Document Changes

Under the old tax regime that was in effect from July 1, 2009 until June 30, 2015, options generally were taxed at vesting which obviously was not a good result for companies nor for employees.  As a result, many companies stopped granting options in Australia altogether.  The companies that persevered (often private companies with no alternatives, such as RSUs, available to them) usually imposed special terms designed to avoid a taxable event prior to a liquidity event or at a time when options were underwater.  To achieve this, they restricted exercisability of the options until a liquidity event occurred and/or until the option was in the money.

For options granted prior to July 1, 2015, these restrictions should continue to be enforced because the old tax regime continues to apply to these grants.  However, for options granted on or after July 1, 2015, these restrictions are no longer needed.  This means companies should revise their award documents and delete these restrictions (usually contained in the Australia appendix to the award agreement). Continue reading

New French-Qualified RSU Regime in Effect, but…

As described in our client alert, the new French-qualified RSU regime (Loi Macron) finally became effective on August 7, 2015.  I have discussed the benefits for the new regime in an earlier blog post.

Unfortunately, the news is not all good.  This is because the law provides that qualified RSUs can be granted under the new regime only under a plan that has been approved by shareholders after the effective date of the law (i.e., after August 7, 2015).  Of course, we do not expect that any of our clients will ask their shareholders to approve a new plan or re-approve an existing plan just to grant French-qualified RSUs.  This means that it is currently impossible for the vast majority of our clients to rely on the new regime (with the exception of only those companies that coincidentally just approved a new plan or had shareholders approve amendments to an existing plan).  For these companies, until and unless their shareholders approve a plan, the conservative advice is to either not grant qualified RSUs or grant them in reliance on the old regime (with 2-year vesting and 2-year additional holding period, as well as employer social tax due at grant at a rate of 30%). Continue reading

Not Ready for SAFE? Cash Awards in China

Although the requirements to obtain approval for an equity plan from the State Administration of Foreign Exchange (SAFE) in China have relaxed over the past few years and, consequently, the approval process has become more predictable and faster, it still requires significant resources (both financially and from a staffing perspective to administer the ongoing requirements).

Therefore, many companies (especially those with a lower headcount in China) are still looking for strategies to avoid the SAFE requirements.  And while there is never a perfect solution, most of these companies choose to grant cash awards.  Cash awards can mean different things, so let’s look at the different alternatives. Continue reading