global espp rollouts: design pitfalls and compliance strategies sf naspp october 7, 2009 valerie h....

Global ESPP Rollouts: Design Pitfalls and Compliance Strategies

SF NASPPOctober 7, 2009

Valerie H. Diamond

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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 to24 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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– 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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– 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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– 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)

Compliance Strategies: Tax

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– 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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– 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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– 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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– Tax filings/notices

– China: Notice 35 filing

– Malaysia: Form BT/ESOS/2000


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– 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)

Compliance Strategies: Regulatory Issues

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– 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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– 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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– 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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– 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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– 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. DiamondBaker & McKenzie LLP(415) [email protected]

global espp rollouts: design pitfalls and compliance strategies sf naspp october 7, 2009 valerie h....

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