Tax-Qualified Plans – Blessing or Curse?

When granting equity awards, one of the most important questions is the tax effect of such awards.  Granting awards that have a negative tax impact on the employee or the company is counter-productive and should lead companies to consider other ways to incentivize their employees.  On the other hand, should companies maximize the availability of favorable tax treatment for equity awards in certain countries?  This is not an easy question to answer.

Favorable Tax Treatment – The Company vs. the Employee

When we talk about favorable tax treatment, it can mean different things depending on the country and the qualified-tax plan.  The most basic distinction is whether the treatment is favorable for the employee, the company, or both.

  • For employees, favorable treatment often means that taxation can be deferred (usually until the shares are sold), the taxable amount can be reduced or characterized more favorably (e.g., as capital gain, rather than employment income), social taxes can be mitigated or avoided, or a combination of the foregoing.
    For the company, favorable treatment usually means that employer social taxes can be reduced or avoided, tax withholding/reporting obligations can be eliminated, or a tax deduction becomes available.
  • Companies will need to consider which of the above are most important to them.  In my experience, it is usually a combination of employer social tax savings and employee tax savings that prompt companies to implement a tax-qualified plan.

The prime example for this is France, where a tax-qualified plan can reduce the very high employer social taxes (up to 46%) that are due on non-qualified awards, but also allow for a tax deferral and potential tax savings for employees.  Of course, French-qualified awards are famously complex, due to the many changes the French legislator has adopted over the last few years (described in more detail in my prior blog post here).

By contrast, in Israel, a trustee plan (Israel’s version of a tax-qualified plan) benefits almost exclusively the employee, but has become so common that companies are almost forced to adopt one, due to competitive pressures. More recently, however, several of our clients have adopted trustee plans in Israel for the main reason of obtaining a local tax deduction, which has become more important in the wake of the Kontera decision, so there is now also a dual reason for such plans in Israel.

The Cost-Benefit Analysis

Before companies decide to implement a tax-qualified plan, they should undertake a careful cost-benefit analysis.  In working with private companies, I have observed that they tend to almost reflexively adopt a tax-qualified option plan in the UK or a French-qualified plan.  This is usually based on advice from local advisors who claim that these plans are common place for companies offering awards in their jurisdiction and that, to remain competitive, awards have to be granted under these plans.

While it is true that tax-qualified plans in these countries can be especially beneficial for private companies and their employees, this advice often omits the administrative burden and cost of maintaining such plans.  Virtually all tax-qualified plans (with France and the UK being no exception) come with various special conditions (such as minimum vesting and holding period requirements) and ongoing filing obligations (such as special annual reporting requirements).  And while the initial preparation and implementation of the tax-qualified plan can be handled by an outside advisor, ensuring that the special conditions are met and completing the ongoing filings typically falls on the company which, in the case of many private companies, may not have sufficient resources to deal with these issues.

Another important consideration is the treatment of qualified awards in a corporate transaction.  This is again especially relevant for private companies which are more likely to be acquired before awards can first be exercised or vest.  If an acquisition disqualifies the awards from the favorable treatment, the qualified plan essentially would have been implemented for naught.

Of course, companies don’t have a crystal ball and whether or not an award could be disqualified depends on the type of acquisition, the treatment of the awards in the acquisition, whether holding periods have been satisfied at the time of the acquisition and many other factors.  Still, dealing with qualified awards in an acquisition is usually cumbersome and, in many cases, it will be necessary or advisable to obtain tax rulings to preserve the qualified status of awards.  For example, in Israel, it seems that any modification of an existing award granted under a trustee plan requires the approval from the Israeli Tax Authority to maintain trustee plan status.

Embarking on a New Tax-Qualified Plan? Answer These Questions First!

As companies decide whether or not to implement a tax-qualified plan in a particular jurisdiction, they should ask themselves the following questions:

  • What is the benefit of the tax-qualified plan?  If the benefit is purely, or mostly, for the employee, how does this affect employees in other countries who may not be able to receive the same tax benefits?  Are the employer social tax savings significant enough to warrant the implementation and maintenance cost of the plan, as well as the administrative burden?
  • Has everyone weighed in on the decision to implement a tax-qualified plan?  Operating a qualified plan will most likely have a significant effect on the stock plan administrator who will need to administer special terms, such as holding periods, and comply with ongoing requirements.  It can also have corporate tax and accounting consequences which should be socialized with the right people within the organization.
  • Who should pay for the implementation and maintenance of the plan?  If the main benefit of the plan is employer social tax savings, perhaps it is appropriate to allocate the cost to the local entity.
  • Do we have the administrative capacity to administer the qualified plan?  In this respect, it is important to understand all of the requirements and any ongoing filing requirements.  I would also consider creating a detailed checklist that can be used to track the requirements and obligations, which can be especially useful if there is turn-over at the company.
  • What does the future hold?  If a company is about to implement a new equity incentive plan, does it make sense to implement a qualified plan under the “old” plan, given that most qualified plans are tied to the parent plan and have to be re-done when a new plan is adopted?  If a corporate transaction is probable, what is the impact of such a transaction on a qualified plan?

At the end of the day, as always seems to be the case with global equity awards, the answer of whether a tax-qualified plan should be implemented is highly fact-specific and depends on the particular circumstances of each company.  The best advice is to not jump into implementation of a qualified plan, but carefully consider all of the benefits and requirements and seek input from multiple stakeholders.

To Learn More

In case you are planning to attend the 2017 GEO National Equity Compensation Forum in Rancho Palos Verdes from September 13-15, I invite you to attend the presentation on this topic that I will participate in, together with Jennie Anderson from Microsoft and Wendy Jennings from Cisco.  Jennie and Wendy are among the most experienced stock plan administrators in the industry and will no doubt have great tips when it comes to tax-qualified plans!  If you have not registered yet, please see our invitation here for a special discount offer.

Total Reward Statements and Equity Awards

The Rise of Total Reward Statements

Starting a few years ago, many companies embraced the use of Total Reward Statements (TRS) in which they tried to summarize all of the different compensation items paid to an employee in one statement, ostensibly to make it easier for an employee to see, at a glance, how much money they were actually making.  A TRS usually includes base salary, bonus payments, commission payments and, of course, equity awards.

Because only the parent company has all of the information regarding the various compensation items, it is the parent company that prepares and issues the TRS (typically by posting it on an intranet site), even for employees employed by (foreign) subsidiaries.

Equity Award and Local Employer Compensation Information Do Not Mix

For these employees, however, mixing information related to equity awards with information on compensation paid by the local employer is a bad idea.  As you may have heard me or one of my colleagues say repeatedly: the equity awards always should be communicated, administered and generally be kept as separate as possible from the employment relationship.  This is to mitigate the risk of various claims the employee otherwise might raise, such as joint employer liability (i.e., that the foreign parent is another de-facto employer that can be sued over grievances related to the employment relationship), vested rights and entitlement claims or increased severance claims (i.e., that the equity award income has to be factored in when calculating severance or other termination benefits).  If the equity awards are considered part of the employment relationship, it can also lead to a requirement to translate award documents into local language or to consult local works council before equity award programs can be implemented, modified or terminated.

Consequently, even though equity awards are undeniably part of the total incentive package, ideally, they should not be mentioned in a TRS which also covers compensation paid by the local employer.  Instead, they should be communicated separately by the parent company (i.e., the grantor of the equity awards).

Of course, communicating the equity awards separately somewhat defeats the purpose of the TRS, so invariably, HR will not go for this advice and push to keep all of the compensation items in one statement.

In this case, consider making certain changes to the TRS to make it clear that the equity awards are provided by the parent company and are separate from the compensation paid by the local employer.  This usually can be done by including disclaimer language in footnotes or elsewhere.

In addition, pay attention to how the value of the equity awards is communicated.  I have seen several TRS which set forth a dollar amount for equity awards which is based on the current share price of the underlying shares, without further explanation.  This is misleading and can create unrealistic expectations for the employees in case the awards are unvested.  It is important to be clear that the awards will be of value only if they vest (and, in the case of options, the employee exercises the options) and that the income that may eventually be realized can differ greatly from the current (estimated) value, due to share price fluctuation.

With these additional disclaimers and clarifications, the risks described above of mentioning equity awards and “local” compensation in one TRS can be mitigated.

Not All It’s Cracked Up To Be

As a side note, I have heard from several companies that TRS are not all what they hoped them to be.  First, many companies find it very challenging and labor intensive to keep the statements up-to-date (unless an automatic feed is implemented, which is also challenging).  Second, it seems employee engagement quickly fades, most likely because even with a TRS, it is difficult to assess total compensation at a glance (especially if it is comprised to a large extent by incentive compensation subject to performance conditions).

So, maybe you will be able to talk HR out of using a TRS altogether!

Ready for Australian and UK Year-end Share Plan Reporting?

There are a few countries that require special annual reports for share plan transactions (in addition to regular annual payroll reports).  Australia and the UK are among these countries and are both on a fiscal year that differs from the calendar year.  The UK tax year ended on April 5 and the Australian tax year will end on June 30.

  • The UK Annual Share Plan Return (formerly known as Form 35, for tax-qualified awards, and Form 42, for non tax-qualified awards) is due to Her Majesty’s Revenue & Customs (“HMRC”) by July 6.
  • The Australian Employee Share Scheme (ESS) Return must be filed with the Australian Tax Office by August 14.  In addition, companies are required to provide their Australian employees with ESS statements by July 14.

Both returns (and the Australian ESS statements) can take a while to prepare (especially if companies need to report transactions for mobile employees and/or awards that were adjusted in a corporate transaction) and will need to be submitted electronically.

Please see our client alerts for Australia and the UK for more information on how to prepare the returns and make the submission.  We are aware that the HMRC website was affected by an outage during the month of May, so companies may have less time than normal to make the UK submission.

Our Sydney and London offices are available to assist with the preparation and submission of the returns.

Oops, the French Did it Again……

Less than 18 months after the latest amendment to the regime for tax-qualified RSUs in France, another amendment became effective on December 30, 2016.  This amendment is the third amendment to the regime in five years, meaning that companies may (in theory) have to administer tax-qualified RSUs that are subject to three different income tax and social tax regimes.  The three different qualified RSU regimes are as follows:

  • French-qualified RSUs granted after September 28, 2012 (“Pre-Macron RSUs“)
  • French-qualified RSUs granted under a plan approved by shareholders after August 7, 2015 (“Macron RSUs“)
  • French-qualified RSUs granted under a plan approved by shareholders after December 30, 2016 (“Modified Macron RSUs“)

For companies that have granted tax-qualified RSUs in the past, the question is whether they will want to continue to grant qualified RSUs after the latest changes.  Similarly, companies that have granted non-qualified RSUs in France or that are starting to grant RSUs in France for the first time will want to evaluate whether they can and want to grant tax-qualified RSUs under the new regime.

Background

Granting equity awards to employees in France can be expensive because of the high employer social taxes.  In particular, any income realized from a non-qualified equity award (e.g., spread at option exercise, FMV of shares at vesting of RSUs) is subject to employer social taxes at a rate of up to 46%.  The 46% rate is comprised of different social insurance contributions, only some of which are subject to a cap.  This means that even awards granted to highly compensated employees will remain subject to employer social taxes at a rate of approx. 25%(while the employees will have reached the contribution ceilings for the other contributions with their other compensation).  If a company grants awards on a broad basis in France, makes large awards to some employees or if the stock price increases significantly after grant, accordingly, the French employer is looking at a big employer social tax liability.

Many companies have been trying to mitigate employer social taxes by granting tax-qualified awards.  Several years ago (before it was possible to grant French-qualified RSUs), no employer social taxes whatsoever applied to French-qualified options.  Recognizing the loss of significant tax revenue, the French government started to impose employer social taxes on tax-qualified awards, but the timing of the taxation and the tax rate have changed significantly over the years.  Some of the changes have made it very difficult for companies to determine whether granting tax-qualified awards is, indeed, beneficial for them.

Determining Which Tax Regime Applies

Before we look at the possible tax benefits of granting tax-qualified RSUs (versus non-qualified RSUs), let’s first discuss under which regime companies may be able to grant qualified RSUs.

Strangely, this depends on when the plan under which the RSUs are granted was last approved by shareholders.  If the plan was last approved on or before August 7, 2015, qualified RSUs can be granted only under the Pre-Macron Regime.  If the plan was last approved after August 7, 2015 and before or on December 30, 2016, qualified RSUs can be granted only under the Macron Regime.  If the plan was last approved after December 30, 2016, qualified RSUs can be granted only under the Modified Macron Regime.

Because it is unlikely that companies would take their plan to shareholders just to be able to grant qualified RSUs under a particular regime (or obtain approval just for a French sub-plan), the application of the different regimes is somewhat random*.

Employer Social Tax Treatment Under Different Regimes

As mentioned, the timing and rate of the employer social taxes varies significantly depending on the applicable regime and can be summarized as follows:

Non Qualified RSUs Pre-Macron RSUs Macron RSUs Modified Macron RSUs
Rate Up to 46% (same as for salary) 30% 20% 30%
Taxable event Vesting date Grant date Vesting date Vesting date
Taxable amount FMV of shares at vesting FMV of shares at grant or fair value as determined under IFRS 2 (at election of employer) FMV of shares at vesting FMV of shares at vesting

It is important to note that, if the employee forfeits the RSUs before vesting (typically because the employee terminates prior to vesting), no employer social taxes will be due under any of the regimes, except the Pre-Macron Regime.  For RSUs granted under the Pre-Macron Regime, the employer has not been entitled to a refund for the employer social taxes paid at grant (which has been one of the reasons why it has been so difficult to evaluate whether such RSUs can result in employer social tax savings when compared to non-qualified RSUs).  However, this might change due to a challenge that is currently pending with the French Constitutional Court.

If successful, employers will be able to apply for a refund (likely both for previously granted awards and for future awards).

Employee Tax Treatment Under Different Regimes

The employee tax treatment also varies quite a bit depending on the applicable regime, as follows:

Non Qualified RSUs Pre-Macron RSUs Macron RSUs Modified Macron RSUs
Annual vesting gain not exceeding €300,000 Portion of annual vesting gain exceeding €300,000
Taxable event / Taxable amount Vesting date/FMV of shares at vesting Sale of shares/Gain divided into Vesting Gain (FMV of shares at vesting) and Capital Gain (sale proceeds minus FMV of shares at vesting)
Income tax Taxation as a salary income

Taxed at progressive rates up to 45%

Taxation as sui generis gain

Taxed at progressive rates up to 45%

Taxation as a capital gain

Taxed at progressive rates up to 45%, but application of rebate on entire gain (i.e., vesting and capital gain) if shares held for certain period: 50% if shares held at least 2 years; 65% if held more than 8 years

Same as Macron RSUs Same as Pre-Macron RSUs
Social taxes Up to 23% (same as for salary) of which approx. 20% is tax deductible 8% of which approx. 5.1% is tax deductible + 10% specific social contribution 15.5% on entire gain of which 5.1% is tax deductible

The gist of the above is that RSUs granted under the Pre-Macron regime are not very beneficial to the employee, even compared to non-qualified RSUs.  For Macron RSUs (and for Modified Macron RSUs, provided the employee does not realize more than €300,000 in annual gains), the tax treatment can be dramatically better, but only if the employee holds the shares for at least two years after vesting.

Main Requirements under Different Regimes

Various requirements have to be met to qualify for the special tax treatment under any of the French-qualified RSU regimes.  The most significant ones are as follows:

Non Qualified RSUs Pre-Macron RSUs Macron RSUs Modified Macron RSUs
Minimum Vesting Period None Two years One year One year
Minimum Holding Period None Two years from relevant vesting date Two years from grant date Two years from grant date

For Pre-Macron RSUs, this means shares generally cannot be sold any earlier than after the fourth anniversary of the grant date, as opposed to two years under the Macron and Modified Macron Regimes (exceptions may apply in the case of death or disability).  This makes the Macron and Modified Macron Regimes a lot more attractive for employees.

However, several additional requirements apply that can be difficult to administer for the issuer (e.g., closed period restriction at sale, accelerated vesting at death).  These requirements are the same under all of the different qualified RSU regimes.

Conclusion

Given all of the complexities related to the tax treatment and the requirements of qualified RSUs, it is almost impossible to say whether it is a good idea to grant qualified RSUs in France.  So much depends on the company’s circumstances, not least on the regime under which the RSUs can be granted.

However, I would generally caution companies to grant qualified RSUs, unless they have a strong stock administration team that can properly administer these awards and keep track of the many changes that have occurred.  If qualified RSUs are granted, but then not correctly administered (e.g., holding periods are disregarded), companies risk disqualifying the RSUs which can have disastrous tax consequences for both the employer and the employees (and be way worse than if the company had granted non-qualified RSUs).  Companies should also consider that disqualification can occur if awards are adjusted due to corporate transactions, with the same negative tax consequences.

Furthermore, I am not convinced that we have seen the last of the changes to the qualified RSU regimes.  As France prepares to elect a new President and usher in a new government, it is very possible that more tax reforms are on the horizon (especially if Mr. Macron wins the election…..).

On the other hand, I recognize that some companies have granted qualified RSUs for years and that changing to non-qualified RSUs can be a difficult “sell” to employees (and maybe the French employer).  Similarly, companies that are fortunate enough to be able to grant Macron RSUs may be happy to shoulder the burden of administering French-qualified RSUs in return for a flat 20% employer social tax at vesting.

So, again, every company should carefully consider whether it makes sense to grant qualified RSUs.  And, in any event, we all must stay tuned for further changes!

*That said, we are aware of a few companies that have either timed their shareholder approval to be able to rely on a specific regime (typically only possible for private companies) or that have sought shareholder approval for a French sub-plan (even though no amendments were made to the general plan).

The Go-To Guide to 2016-2017 Filing / Reporting Requirements for Global Employee Share Plans

2016-2017

It is almost the end of the calendar year, and in addition to wrapping up gifts and holiday parties, it is time for multinational companies to consider the necessary tax and regulatory filings for global stock plans triggered by the close of 2016. As you consider the steps your company may need to take to start the new year right, please see our Global Equity Services Year-End / Annual Equity Awards Filing Chart, which contains key filing and reporting requirements for 2016 and 2017.

Happy Holidays from Baker McKenzie – wishing you prosperity in the New Year and favorable equity regulations around the globe!

Brave New World: Withholding in Shares After Changes to ASC 718

brave-new-world

Many companies are considering changing their tax withholding practices after FASB modified the accounting rules for share-based awards (ASC 718). For most companies, the modified rules become mandatory for accounting periods starting after December 15, 2016, although companies are able to voluntarily implement the revised rules earlier.

The changes to ASC 718 were mainly intended to facilitate tax withholding for equity awards granted to employees outside the U.S., but have also raised questions for taxes withheld for U.S. executives. Continue reading

Blame it on Switzerland

 

 If we are looking at significant trends in 2013 affecting equity compensation programs, then the rise of foreign asset and account reporting obligations will have to be one of them. And Switzerland is to blame for it, sort of.

For many years, wealthy individuals all around the globe, including in the US, have deposited millions of dollars in Swiss bank accounts, where local bank secrecy laws were thought to keep them hidden from the tax authorities. The IRS finally got fed up with this practice and started to aggressively pursue these hidden assets. Part of this strategy included introducing new reporting obligations (through the adoption of the Foreign Account Tax Compliance Act, or FATCA) as well as stricter enforcement of existing reporting obligations (by introducing harsher penalties for failure to comply with the Foreign Bank Account Reporting Act, or FBAR).

Under both FATCA and FBAR, US taxpayers are required to report (as part of their annual tax return) foreign bank accounts and other foreign assets, thereby ensuring that the IRS can get its share of taxes due on such assets. Many countries are now following suit and are adopting similar reporting requirements for their tax residents (Korea, Japan, Argentina) or beefing up and imposing stricter penalties for existing reporting requirements (Canada, Spain, Italy).

Getting people to pay their fair share of taxes is great but why should you care as an equity plan professional?

Well, if you are an issuer, then you most likely work with a broker/plan administrator that allows your plan participants to open brokerage accounts to hold their shares acquired under the plan as well as any proceeds from such shares. If these accounts are maintained outside the US, your US plan participants will need to comply with FBAR and FATCA. If the accounts are maintained in the US, many of your non-US plan participants (depending on their country of tax residency) will now also have to report such accounts.

Is this really your problem as an issuer?

No, technically, the obligation to complete the reports lies with your plan participant, and the company (or the plan administrator) has no liability if the plan participant does not report (or not correctly reports) the accounts or assets in the account. That said, I think it is fair to assume that many plan participants (especially if you are offering your plans not just to high level executives) are not aware of foreign account or asset reporting obligations, and it may not occur to many of them that, by participating in your equity plan and setting up a foreign brokerage account, they are now subject to these reporting obligations.

Given the stiff penalties that apply in many countries if accounts and assets are not correctly reported, I think it is good practice to notify your plan participants of these obligations and advise them to talk to their personal tax advisor about whether they need to complete a report. This notification (which usually does not have to be more than a paragraph) can be included either in the grant agreement/notice (or in a country-specific appendix to the agreement) or in a tax supplement (if your company provides such information to participants).

We will probably see more countries introduce foreign asset and account reporting requirements over the next few years, so make sure to review the requirements on a regular basis. Your plan participants will thank you for letting them know about these requirements and (hopefully) keeping them out of trouble.

Giving Employees a Choice

 

In the past several months, I have seen two companies (both large Fortune 100 companies in different industries) evaluate the merits of a choice program and it looks like both of these companies will move forward with such a program.

In both cases, the companies will let employee choose what type of awards they should be granted during the annual grant cycle, e.g., 100% RSUs or 100% options or 50% options/50% RSUs, and so forth. Usually, there is a default (e.g., 100% RSUs) if the employee fails to make a choice.

 

Choice programs are nothing new,  but they are often limited to top executives or used only in special circumstances.  Here, the choice will be offered to all employees who are eligible to receive equity grants during the annual cycle, for both companies a significant number. 

So, is this a trend or just a coincidence? More importantly, is it a good idea to offer a choice program? 

From a legal perspective, there are less issues than you might expect, provided the program is structured properly.  In particular, the choice should be made before the actual grant occurs, and it is important to communicate to employees that making an election does not guarantee getting a grant (for example, if an employee terminates employment before the grant date, they would normally not be able to get a grant, regardless of any election). 

The Remorse Risk

The most significant legal risk related to choice programs is what I call the “remorse risk” where an employee later regrets his/her choice and claims the company should compensate or put the employee in the financial position they would be in had they made the “right” choice.  The argument would be that the company failed to properly educate the employee about the risks related to the different choices. 

I am not aware of any lawsuits in this regard, but, in surveying our foreign offices, most of them identified the “remorse risk” as the most important and real risk.  To mitigate this risk, companies will need to bite the bullet and ramp up the education they provide to employees regarding the different types of awards.  A simple plan prospectus describing the awards is unlikely to be sufficient.  Companies should prepare different examples showing how the awards fare depending on the development of the stock price and consider providing employees with calculation tools to run their own numbers. 

In addition, it will be important to educate employees on the different tax treatment of the awards, especially in those countries where the treatment can be dramatically different (e.g., Canada, Brazil).  In my experience, many companies do not provide tax information to foreign employees.  And while I would argue that companies should always provide such information, I recognize that the risk of not doing so is currently low (at least for US companies). 

However, the situation is different for choice programs, because the tax treatment can have a crucial impact on the value of the respective award.  By not providing the employee with tax information, companies set themselves up for complaints that the employee was not able to make an informed choice regarding his/her awards, and the “remorse risk” looms large. 

Another issue to consider is translation of the documents.  Again, most companies do not translate their grant documents into local language.  Translation is typically not legally required, so companies shy away from the costs associated with translations.  However, if we really want to make sure that the employee understands the choices offered, a translation of at least the educational materials related to the choice program is advisable. 

Additional Bumps in the Road

Aside from the risks outlined above, the other legal issues are mostly benign.  In some countries (e.g., Australia, Malaysia), there is a risk that offering the choice will accelerate the securities filings which are normally due only when grant materials are distributed (after the grant), or create a second securities filing obligation (in addition to the after-grant filing).  However, even though these accelerated or additional filings can be annoying, they are typically easy to complete and a concern only in very few countries.

Last but not least, companies should consider the additional administrative burden as well as the expense created by a choice program.  In addition to preparing additional educational materials, as well as possibly translations, timing can also become a concern because the choice program should be offered at least 2-3 months before the grant date, which means companies will need to start preparing for their annual grants even earlier.  Then, companies need to think about how to offer the choice: will they hire a third-party vendor to administer the elections, should they build an in-house election tool, etc.?

There is no doubt that a choice program raises some legal risks not typically seen with “regular” grants and creates a significant additional administrative burden for the company.

However, employees will appreciate the opportunity to take charge of their financial destiny and become more engaged in the grant process, thereby maximizing the value of the company’s equity programs and increasing employee satisfaction.  Well, at least one can hope…

Spring Time for Annual Grants

  We are at a time of year when many companies are making their annual grants so let’s discuss some best practices and “do’s and don’ts” regarding the preparation for annual grants. I am approaching these issues mainly from a legal perspective, so my comments below omit crucial steps that should not be forgotten, such as working with your accountants to determine the expense for the grants, working with your outside plan administrator to ensure documents are posted properly and on time, brokerage accounts set up, etc.

 
Time is your Friend

Allow for enough lead time and start preparing at least 3-4 months before the grant date.

At that time:

  • Talk to HR about the proposed grant recipients
  • Determine the countries in which grants will be made
  • Determine the number of grant recipients in each country
  • Talk to Legal about any changes to last year’s grant terms and award agreements


NOTE:
If significant changes are considered, give yourself, and your advisors, even more lead time. At Baker & McKenzie, we have developed an annual grant questionnaire which lists all of the questions that you need to answer to get prepared for your annual grants, and we have found this tool to be very helpful in getting timely information from our clients.

Compliance is a Beautiful Thing

Once you have gathered the information above, ask your advisor to prepare or update a tax/compliance analysis for the upcoming grants. This can take the form of a chart, memorandum, or if you are not worried about having a paper trail, even a phone conversation. The purpose of this analysis is to evaluate if any changes in local tax or regulatory rules require changes to the current year’s grant practices.

Example: The Australian securities regulator has shocked us recently by declaring that RSUs are derivatives and can, therefore, not benefit from the typically available prospectus exemptions in Australia. If you normally grant RSUs in Australia, a decision has to be made whether to no longer grant such awards, grant a different type of award, assume the risk of granting, or seek a special exemption from the regulator. In the annual grant chart or memorandum, your outside advisor should discuss the different alternatives and provide a recommendation, but it is important to schedule a meeting or call with a cross-section of company representatives (usually Legal, HR, Stock Administration, Finance and Tax) to reach a decision that “works” for your company.

After the analysis and discussion within the company, you hopefully have a game plan regarding the types of awards you will grant and any filings or other compliance actions you must take prior to or upon the grant.

Jump into Action!

This is when we will shift to the preparation of the grant documents and requisite filings. If you are not implementing any significant changes to the award terms, usually only minor (if any) updates to the award agreement will be required. However, because country rules invariably change in the span of a year, you will see that country-specific appendices need to be updated and that there are often significant changes from year to year.

Practice Tips:

  • Should the changes require you to change the administration of the awards, make sure to discuss them with your broker to ensure the broker can manage any restrictions that you may have to impose (e.g., cashless exercise restrictions that are recommended or necessary in several countries to avoid regulatory or tax issues).
  • Give thought to the procedure for adopting any changes you make to your grant documents. Many companies have delegated the authority to prepare or amend grant materials to an officer of the company so changes can be implemented relatively quickly. Other companies require their Board or Compensation Committee adopt any amendments to award documents and/or country-specific appendices. In this case, you will need to allow enough time to get the amended documents in front of the Board or Compensation Committee.
  • If your company translates some or all of the grant documents, build in sufficient time to prepare/update the translations. Generally speaking, translations of grant materials are not legally required, but some companies determine that translations are advisable to ensure that grant recipients understand the terms of their awards or because the company has previously created a practice of translating grant documents which now has evolved into a legal requirement.
  • In case you have expatriate employees (and who doesn’t….), consider what grant documents to distribute to them. If you use global award agreements, this should typically not be an issue, because all grant recipients will receive the same documents, regardless of where they are located. However, if you use country-specific agreements, or a US agreement and a non-US agreement, this issue can be trickier, as you will need to decide whether to distribute the documents of the employee’s home or host country. Unfortunately, there is no rule of thumb that can be followed here, because the analysis always depends on the specific countries in question. I recommend you compile a list of the expatriates and discuss the best approach with your counsel.

Work with your outside counsel to determine any filing obligations that may be triggered by the grant and/or the distribution of grant documents to employees.

Example: In Malaysia, both a securities and a tax filing generally are required within a certain period of time after grant and distribution of the grant materials. This means you will need to keep your counsel apprised of when the grant documents are actually distributed to the grant recipients so that any filing deadlines can be met.

History Repeats Itself

Document your decisions. This will make it so much easier when you prepare for the following year’s grants or when you receive questions from employees or other colleagues within the organization.

The Last Word

Preparing and going through the annual grant process can be stressful because there are so many different moving parts. I strongly encourage you to establish annual grant practices and/or checklists that you can follow year after year, to make sure you can stay on top of legal requirements and adapt your grants to the ever-changing legal and tax environment for global equity awards.

    

Welcome to The Equity Equation!

 

Welcome to my first blog on the fascinating topic of global equity and incentive awards. I am a partner with Baker & McKenzie (in our San Francisco office) and have focused on advising multinational companies on all aspects of their global equity and incentive programs for over 14 years. I will use the blog to share my thoughts on new (or not-so-new) developments that could affect your equity or incentive programs, best practices for these programs, as well as industry news and company trends.

I am always open to suggestions for my next topic, so if you have an idea for a blog-worthy post, please feel free to share it with me at barbara.klementz@bakermckenzie.com.