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

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.