Susan P. Serota – Pillsbury Winthrop Shaw Pittman, LLP Pillsbury Winthrop Shaw Pittman LLP GLOBAL...

Susan P. Serota – Pillsbury Winthrop Shaw Pittman, LLP

Pillsbury Winthrop Shaw Pittman LLP

GLOBAL EQUITY PROGRAMS

2 | GLOBAL EQUITY PROGRAMS

GLOBAL EQUITY PLANS

Domestic and Foreign multi-national employers sponsor Global Stock Plans

Foreign issues must consider US securities and tax laws Domestic issuers must consider US and foreign securities, tax,

exchange control and employment laws


SEC ISSUES

Securities may not be offered or sold to US citizens unless the securities are:

Registered under the Securities Act of 1933 (e.g., through prescribed filings with the SEC and issuance to potential purchasers of an offering prospectus that meets elaborate SEC content requirements), or

Exempt from such requirements


SEC ISSUES

Rule 701 provides an exemption that can be used by foreign companies that do not file reports with the SEC

The Rule is designed specifically for equity compensation plans, but can be used for plans which offer deferred compensation obligations, which are deemed “securities”

If the exemption requirements are satisfied, a company may grant stock, options or other securities to U.S. employees without having to comply with the SEC registration requirements


SEC ISSUES

Key provisions of Rule 701

Each participant in the plan must be provided with a copy of the plan document

Sales of securities in a 12-month period cannot exceed the greatest of: $1 million 15% of the company’s total assets 15% of the outstanding securities of the class involved

Options are considered sales at the time the options are granted, and dollar limits are calculated by the grant value (i.e., exercise price times number of shares)


SEC ISSUES

Sales in excess of $5 million in any 12-month period will trigger a requirement for additional disclosure requirements Must disclose (i) the risk factors associated with investment in the

securities and (ii) company financial statements, among other items Effective 3/4/2008 the financial statements may be prepared in

accordance with the IASB International Financial Reporting Standards Previously, reconciliation with U.S. GAAP was required

Disclosures must be furnished a reasonable period before the purchase

Even if expanded disclosure not required, some companies provide additional disclosure to minimize risk of claims under the “anti-fraud” provisions of the Securities Act


SEC ISSUES

Regulation D provides an alternative exemption

Equity awarded to individuals who qualify as “accredited investors” are exempt from registration

An individual with income above $200,000 in each of the last two years (and reasonably expected to maintain that level in the current year) can qualify as an accredited investor Alternative—an individual with over $1 million in assets (including

value of home)


SEC ISSUES

Outright award of shares (e.g., restricted stock, performance shares, an SAR) may avoid reliance on either Rule 701 or Reg. D under the so-called “no-sale” exception from registration

Companies that want to grant equity compensation in the U.S. need to check for compliance with relevant state laws These are sometimes referred to as “blue sky” laws Applies to companies whose securities are not listed on a

national exchange.


STOCK EXCHANGE RULES

Equity Compensation Plans generally require Shareholder Approval

Exemption for foreign broad-based plans similar to tax qualified plans, 423 stock purchase plans or parallel excess plans, except for differences required by foreign law FAQ permits insubstantial differences FAQ permits substantial differences to comply with foreign tax laws

Different local laws considered on a case by case basis Written disclosure to Exchange required Material revisions require approval of Compensation Committee of Board


US ISSUER GLOBAL EQUITY PROGRAMS

Compliance with US Securities Laws

1933 ACT – Registration and Prospectus Local (Foreign Jurisdiction) Tax Consequences Form S-8

Exemptions Rule 701 Regulation D Regulation S



Regulation S

Limited to Offerings Outside the US Covers both Sales and Resales Typically Used by US Grantees of Foreign Company Stock to

sell shares on Foreign Exchange



Regulation S Exempts from Registration with the SEC Offers to non US employees who work outside of the US

All Offers and Sales Outside of US Issuer does not engage in Offer or Sale inside the US



Conditions of Regulation S Exemption

Securities Issued for Compensatory Purposes Services Cannot be Rendered in a Capital Raising Transaction Interests in Plan Cannot be Transferable Except on Death Issuer Must Take Reasonable Steps to Preclude Offer or Sale

in the US Documentation must state Securities Not Registered Under US

Laws and May Not be Offered or Sold in US unless registered or exempt from Registration



EU Prospectus Directive

Applies to All Offers of Securities made to the Public in any Member State which exceeds 2.5 million Euros in a 12 Month Period One EURO = $1.27 as of November 10, 2008

Employee Share Purchase Schemes Covered Exception if listed on an EU exchange Stock Options not deemed to be securities Exemptions for small grants and “qualified investors

Non EU Companies Must Choose a Home Member State Non EU Companies Must Use IFRS Accounting Standards



EU Prospectus Directive

January 2009 proposal to extend “employee share scheme exemption” to all companies making offers under employee share plans to employees resident in the EU as long as a document is made available containing information on: Number and nature of securities offered

Expected to be implemented in 2011 CESR FAQ (2/09) provides temporary solution to public issuers

offering stock under employee share schemes in the EU Short-form disclosure Still need approval of Home Member State competent authority


TAX ISSUES

U.S. tax rules apply to determine tax treatment of executives without distinction between foreign and domestic stock

Need to be sensitive to unexpected consequences due to differing foreign design practices (e.g., nil-priced options, “good-leaver” vesting of shares, etc.)

ISO and 423 Plans require 50% ownership of subsidiaries up to parent issuer Employees of entities taxed as a partnership will not receive

favorable tax treatment


US ISSUER GLOBAL EQUITY PLAN ISSUES

Local Tax Consequences

Timing of Event Measure of income Ordinary vs capital gain Social taxes

Employment Issues UK Age Discrimination Rules


TAX ISSUES

IRC § 409A presents a unique challenge for arrangements funded outside the U.S.

Unfavorable tax consequences arise when assets set aside in an offshore trust in connection with a deferred compensation arrangement

In some locations, it is common for an equity compensation program to use a trust to acquire and hold shares ultimately transferred to plan participants

Examine whether the arrangement involves deferred compensation If so, need to dissolve the trust or locate it in the U.S. at least for U.S.

participants


INTERNATIONAL IMPLICATIONS OF 409A

Extraterritorial application of IRC Section 409A.

Global Workforce Expatriates Non-Resident Aliens Resident Aliens Third Country Nationals

Section 409A imposes new tax rules – and harsh penalties for failing to comply with these rules – upon “deferred compensation” plans.


INTERNATIONAL IMPLICATIONS OF SECTION 409A Section 409A

No flat exemption of compensation arrangements made by foreign-owned companies or by U.S. companies with operations abroad.

Final regulations—exceptions permit both U.S. citizens and resident aliens working abroad, and non-resident alien individuals working within the United States, to accrue benefits under foreign plans that do not meet the Section 409A requirements.

Where no exemption applies—necessary to amend the foreign arrangement to comply with Section 409A requirements by 12/31/08.


NEW SECTION 457A

Enacted with the Emergency Economic Stabilization Act of 2008 (bailout legislation)

IRS issued guidance in Notice 2009-8 [Jan 2009]

Taxes “nonqualified deferred compensation” of “nonqualified entities” in the year in which it is no longer subject to a “substantial risk of forfeiture”

Primarily intended to eliminate deferred compensation of hedge fund managers of funds located in jurisdictions with favorable tax regimes, but the law sweeps in many other offshore entities

Plan compliance required as of January 1, 2009, subject to limited relief under Notice 2009-8


GLOBAL AWARD AGREEMENTS

Usually Governed by Law of Parent Company’s (Issuer’s) Jurisdiction

Award Agreements Often Contain Clawbacks for violations of restrictive Covenants Non-Solicitation Non-compete Required disclosure



Articles 18 and 20 of Brussels I Regulations provide that employers can sue EU-domiciled employees in relation to “matters relating to individual contracts of employment” only in courts of the country in which employee is domiciled. Employees can agree to alternative jurisdiction only after a

dispute has arisen. Binding on EU Courts.

Samengo-Turner v. J&H Marsh & McLennan (Services) Ltd.



Rome Convention-Governing Law will be that chosen by parties, except Contracts of Employment-Choice of Law cannot deprive employee of

mandatory rules of law which would have been applicable if no chosen law.

Applicable mandatory law are those where employee works, or if none, where place of business situated

Convention provides that application of rules of law of any country specified in agreement may be refused only if application of such law is manifestly incompatible with the public policy of the forum

Duarte v. Black and Decker

Susan P. Serota – Pillsbury Winthrop Shaw Pittman, LLP Pillsbury Winthrop Shaw Pittman LLP GLOBAL...

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