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Global Stock PlansLegal, Tax, Design and Regulatory Issues
Bob Grayson, Senior Solicitor, Linklaters, London
Carine Schneider, Partner, PricewaterhouseCoopers LLP, San Francisco
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Key Topics
• Key plan features• Terminology• Securities Laws• Communications• Exchange Controls• Data Protection• Labour Laws• Banking and Broking
Bob Grayson, Linklaters and Carine Schneider, PwC
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‘Power of Ownership’
What you always look for from your employees is mental ownership, and that has to go way beyond the ownership that people feel when it comes to stock. The way people feel about the intangibles, the nonquantifiables, is much more important than the way they feel about the tangibles and quantifiable.”
Herb Kelleher
President, Chairman and CEO
Southwest Airlines Co.
Bob Grayson, Linklaters and Carine Schneider, PwC
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Key Success FactorsFirst: A clear vision of what’s to be accomplished
– “Why are we doing this?”
– Objective-driven design and implementation
Communication and Administration
– If they don’t understand it, they can’t appreciate it
– If it seems hard to operate it, it doesn’t work
– If it’s global, it needs to “feel” local
– Need to work out details in advance
Of course, a little stock market luck doesn’t hurt either!
Bob Grayson, Linklaters and Carine Schneider, PwC
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Types of plans• Stock or Share Options• Share Grant • Matching or free shares• Performance• Share Purchase Plan or SIPs• Phantom or SAR plans• Stock Bonus Plan• ESOP
Bob Grayson, Linklaters and Carine Schneider, PwC
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Stock Option PlansDefinition• The right to buy a share of stock at a fixed price
for a specified period of time– If stock price rises above exercise price (or strike
price), the holder can exercise the option and realize a gain (difference between exercise price and fair market value)
– If stock price is stagnant, or drops below the exercise price, the holder gains nothing and loses nothing
Bob Grayson, Linklaters and Carine Schneider, PwC
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Stock Option PlansKey TermsGrant The number of options awarded to an
individual.Exercise Price The price an option holder must pay to buy a
share of stock.Fair Market Value The market price of a share of stock at any
given point in time.Grant Value The number of options granted times the
exercise price at grant (for options granted at FMV).
Term The length of time from the grant date over which the optionee can exercise the option.
Vesting Right earned to exercise options.Present Value Projected current cash equivalent value of a
grant as determined by an option pricing model (e.g., Black-Scholes)
Bob Grayson, Linklaters and Carine Schneider, PwC
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Stock Option PlansDesign ConsiderationsEligibility Exempt/non -exempt, union/nonunion, part-
time/full-time, domestic/globalGrant Frequency One-time/special event, occasional,
annual/recurringGrant Level Fixed percentage of pay, variable based on
co. performance, variable based on individual performance/potential, by level, one size fits
allExercisability Non-compete, clawbackTerm Period of years, attainment of goalVesting Ratable, cliff, performance-acceleratedSpecial Provisions Termination, death, disability, retirement,
change in control
Bob Grayson, Linklaters and Carine Schneider, PwC
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Stock Grant PlansDefinition
• Plan where an employer offers an outright stock grant to a defined group of employees
– Much like providing a compensation payment, but doing it in the form of stock instead of cash
– May contain provisions that ultimate payoffs only occur if certain measures are attained
Bob Grayson, Linklaters and Carine Schneider, PwC
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Stock Grant Plans
Design Considerations
Eligibility Employee groups (exempt, nonexempt, union nonunion, etc.), employee locations
(domestic,global, etc.)
Grant Frequency One-time, or repeat
Grant Size How many shares, differences by employee group
Payout Outright grant, performance attainment
Vesting Immediate, performance attainment
Bob Grayson, Linklaters and Carine Schneider, PwC
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Employee Stock Purchase Plans or SIP (Saving Investment Plan)
Definition
• A plan providing employees with the opportunity to purchase company stock through payroll deduction
– Contribution is generally made from after-tax compensation
– The employee buys directly from the company-- no brokerage expense
– May offer a discount on share price
– Payment is made from payroll contributions (where permissible)
Bob Grayson, Linklaters and Carine Schneider, PwC
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Other Plans
• There are a number of other possible ways to help employees to “feel” ownership:
– Employee Stock Ownership Plan
– Stock Bonus Plan
– Phantom Stock Plan
– Matching or free shares
– Performance plans
Bob Grayson, Linklaters and Carine Schneider, PwC
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Phantom Stock Plans
Definition: Plans where change in stock price is tracked, and an ultimate cash payout is made based on that change.
Most common plan for non-Chinese companies operating plans in China.
Bob Grayson, Linklaters and Carine Schneider, PwC
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Securities Laws
• Are local nationals allowed to own foreign shares?– Does the plan constitute a public offer?– Is there a prospectus or filing requirement?– Can you obtain an exemption from a prospectus
or filing requirement?
• Is there a notification requirement?• Are there any ongoing filing requirements?
Bob Grayson, Linklaters and Carine Schneider, PwC
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Securities Laws
• Avoiding any prospectus requirement
Estonia - better but still not very good
• Less than 50 people
• Up to €40,000
Bob Grayson, Linklaters and Carine Schneider, PwC
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Securities Laws
• Avoiding any prospectus requirement
Finland - good news
• Offer to present or former employees
Bob Grayson, Linklaters and Carine Schneider, PwC
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Securities Laws
• Avoiding any prospectus requirement
Kenya - getting worse
• Less than 100 people
• “Sufficiently knowledgeable to understand risks”
Bob Grayson, Linklaters and Carine Schneider, PwC
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Securities Laws
China
Existing shares - not regulated
New issue shares - no guidance
Result?
• avoid China
• offshore transactions
• cash plans
Bob Grayson, Linklaters and Carine Schneider, PwC
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Communications
• Chosen language?
• Chosen medium?
• Chosen style and content?
• Argentina - new digital signature law
• China - no special legislation
Bob Grayson, Linklaters and Carine Schneider, PwC
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Exchange Controls
• Can local nationals freely transfer currency or receive currency from abroad?
• Can local nationals hold foreign shares?
• If not, what are the limitations?
• Is a cashless exercise feasible?– Cashless for cash– Cashless for stock
Bob Grayson, Linklaters and Carine Schneider, PwC
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Exchange Controls
• Prohibitions
• Consent
• Notifications
• Free flow
Bob Grayson, Linklaters and Carine Schneider, PwC
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Exchange Controls
• China - very restrictive
• Argentina - crisis response
• Romania - prohibition notification
• Slovakia - consent free flow
Bob Grayson, Linklaters and Carine Schneider, PwC
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Data Protection
• Does this country have data protection laws?• Is employee consent required?
– For collection of data– For transfer of data
• Is approval of data protection agency required?• Impact on third party administrators• Alternatives for dealing with data protection
requirements?• EU Safe Harbor
Bob Grayson, Linklaters and Carine Schneider, PwC
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Data Protection
• Consent
• Informed Consent
• Licensing/Registration
• Prohibition unless “adequate protection”
• China
• Thailand
Bob Grayson, Linklaters and Carine Schneider, PwC
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Labour Laws
• Is permission or notification of works council or union needed?– E.g., the Netherlands, Germany, Argentina, Mexico
• Is there a possibility the benefit may become an acquired right?– E.g., Denmark
• Are the proceeds counted for severance payments; other statutory benefits, e.g.; – Spain - severance payments in cases of wrongful dismissal– France - daily illness indemnities
Bob Grayson, Linklaters and Carine Schneider, PwC
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Labour Laws
• Impact on employment contract - “acquired rights”
• Termination rights
• Spain “salary in cash”
• Pension rights
• Works Councils
Bob Grayson, Linklaters and Carine Schneider, PwC
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Banking and Broking
• Global providers
• Who is responsible?
• Salary deductions
Bob Grayson, Linklaters and Carine Schneider, PwC
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ConclusionTraditional Problems
– securities laws )
– foreign exchange ) Improvement
New Issues
– data protection )
– labour laws ) Increased difficulties
– global service provision)
Bob Grayson, Linklaters and Carine Schneider, PwCBob Grayson, Linklaters and Carine Schneider, PwC
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Thank You
Carine Schneider - [email protected]
Bob Grayson - [email protected]
Bob Grayson, Linklaters and Carine Schneider, PwC