1 NASPP Austin Chapter, June 13, 201730 November 2017 The Global Equity Round Up – Global Equity Updates and Grant Document Best Practices NASPP Austin Chapter, June 13, 2017 Narendra Acharya, Partner, Baker McKenzie LLP Sinead Kelly, Partner, Baker McKenzie LLP
2 30 November 2017 Agenda U.S. Updates Best Practices and Recommended Updates for Grant Documents International Updates
3 U.S. Updates
4 United States: Possible Tax Reform2017 Tax Reform for Economic Growth and American Jobs (Outline Released April 26th) The seven individual income tax brackets (39.6%, 35%, 33%, 28%, 25%, 15% and 10%) would be reduced to three rates of 35%, 25% and 10% Deferral of compensation may be less attractive to plan participants Lower rates mean a corresponding decrease in employer compensation deduction Effect on supplemental withholding rate is unclear AMT would be eliminated – will ISOs become more attractive? Death tax would be repealed – no more gifting of awards for estate planning, or non- resident estate tax concerns Net investment income tax (3.8%) would be eliminated – update tax communications Other Targets for Review or Reform? Possible Reconsideration of Rep. Camp Tax Reform Act of 2014 – elimination of Code Section 162(m) and deferred compensation regulations New regulations adopted since January 1, 2016
5 United States: Dodd-Frank Act ChangesPotential Changes to Dodd-Frank’s Executive Compensation Provisions Financial Choice Act passed by House of Representatives last week Repeals: CEO Pay Ratio – final SEC rule also targeted by SEC with re-opening of comment period Employee/Director Hedging requirement Prohibition on incentive-based compensation at covered financial institutions that is excessive or encourages inappropriate risks requirement Amends: Clawback rules, to apply only to officers with control or authority over financial reporting Say-on-Pay rules, to require a shareholder vote only when the company has made a material change to executive compensation (therefore also eliminates Say-on-Frequency) Likelihood for ultimate enactment is unclear Calendar year companies in particular should continue to work on Pay Ratio calculations Say-on-Pay is now an entrenched governance practice that likely will continue as a shareholder outreach and engagement practice among most companies
6 United States: Plaintiff Shareholder LitigationDirector Compensation at Delaware Companies Avoid claims and preserve protection of “business judgment” review of director compensation by including separate, director-specific award limit in shareholder- approved plan Recent case shows high level of deference to shareholder-approved limits - See In Re Investors Bancorp, Inc. Stockholder Litigation (April 2017) Equity Plan Proposals (Yet Again) Plaintiffs alleging highly technical deficiencies in proxy disclosures including re eligible participants and basis of participation (e.g., Intel, Goldman Sachs) Pay close attention to Schedule 14A requirements when drafting proxy proposal Section 16(b) Short-Swing Profit Claims due to Elective Share Withholding A spate of suits filed since August 2016 But recent Texas federal district court case rejected plaintiff claim that company or insider discretion resulted in loss of exemption
7 Best Practices and Recommended Updates for Grant Documents
8 Approaches for Global Equity Award Agreements30 November 2017 Country-Specific Agreements US and Non-US Agreements (with country appendix) Global Agreement (with country appendix) All Grantees Material Terms & Conditions General Non-US Terms & Conditions Country-Specific Terms & Conditions
9 Global Award AgreementGenerally, best practice to use global award agreement for both US and non-US grantees – though depends on company’s preference, countries and grantees Easier to administer Better coverage for mobile employees PROS Lengthy grant document / difficult to read “Scary” – Lots of redundant provisions for US population? Tricky if deferrals or other features not offered to non-US employees CONS Appendix for non-US grantees including international disclaimer language COMPROMISE
10 Best Practice on Tax Withholding Provisions30 November 2017 Best Practice on Tax Withholding Provisions Provide for flexibility of withholding methods Especially useful for non-U.S. employees and unforeseen circumstances Give company (not employee) discretion to choose method, but bear in mind Section 16 insider issue… Plan Provisions Net share w/h Sell to cover Payroll Cash Payment
11 Tax Withholding Provisions Update30 November 2017 Tax Withholding Provisions Update Consider eliminating discretion in Section 16 insider net share withholding provision in light of risks to short-swing profit exemption Net exercise / net share issuance generally exempt as disposition under Rule 16b- 3(e) (i.e., not a matchable transaction) where approved in advance by Board or Section 16 compensation committee SEC Staff has created uncertainty on availability of exemption where issuer has discretion to allow feature - problematic provisions (according to SEC guidance): “Company’s” unilateral authority to withhold shares Plan administrator's consent for insider’s use of share withholding Recall that plaintiff shareholders are targeting this area and claiming that elective withholding by insider is also a problem
12 Tax Withholding Provisions Update (cont’d)30 November 2017 Tax Withholding Provisions Update (cont’d) Update “minimum” rate share withholding language per FASB Accounting Standards Update Possible to now withhold shares at up to maximum rate in participant’s jurisdiction(s) without triggering liability accounting Check plan provisions – often limited to minimum rate withholding Plan may be amended without stockholder approval, per NASDAQ and NYSE guidance But if plan recycles withheld shares, ISS will negatively view such a change to minimum withholding rate, per 2017 policy Consider amending plan outside of stockholder approval process Note - IRS has not changed position on withholding rate requirements Withhold at supplemental rate or get revised Form W-4 from employee Technically cannot allow employees to choose higher withholding rate
13 Best Practice on Employment and Privacy Law30 November 2017 Best Practice on Employment and Privacy Law Include provisions to protect company against common employment claims outside the U.S. Review and update data privacy notice / consent to reflect new and amended laws and practices Vested rights; entitlement issues Continued vesting/exercisability through notice period Equity benefits included in severance indemnity / termination payments Establishment of employment relationship between issuer and grantee Claims regarding decrease of award / share value
14 Confidentiality Covenants Update30 November 2017 Confidentiality Covenants Update Revisit confidentiality provisions (if any) in equity award agreements, as such provisions are increasingly regulated given focus on whistleblower protection SEC - Per Dodd-Frank Act (“Whistleblower Incentives and Protection” addition to Exchange Act) and SEC Rule 21F-17, any action impeding an individual from reporting securities law violation to SEC is prohibited High level of SEC enforcement and penalization – SEC announced more than $100M in awards as of August 30, 2016 Make sure confidentiality provision includes appropriate carve-out regarding disclosures to government agencies OSHA – Under new (Sept 2016) policy guidelines regarding settlement agreements and confidentiality provisions, specific language regarding employee’s right to provide information to government and receive whistleblower awards is recommended
15 Confidentiality Covenants Update (cont’d)30 November 2017 Confidentiality Covenants Update (cont’d) Consider including prescribed notice if award agreement restricts trade secret disclosure Defend Trade Secrets Act of 2016 Creates federal cause of action for misappropriation of trade secrets and requires specific notice to employee of immunity for certain types of trade secret disclosure Failure to include notice results in a forfeiture of the company’s right to recover exemplary damages, or attorneys fees, in a trade misappropriation action against an employee (or a contractor/consultant)
16 Best Practice on Clawbacks30 November 2017 Best Practice on Clawbacks Incorporate / review clawback provision (and policy) Clawbacks are not new, but are increasing in prevalence Sarbanes Oxley - Section 304 TARP clawback for troubled financial institutions Dodd-Frank Act - Section 954, and Section 956 for financial institutions EU Capital Requirements Directive (CRD IV) ISS and Glass Lewis consider clawback policies when making say on pay and other compensation-related voting recommendations Shareholder proposals have also prompted companies to adopt clawback policies Design clawback provision with flexibility to (i) cover recoupment required by law, or governance requirements, (ii) penalize detrimental conduct and (iii) address payment mistakes Be wary of excess discretion to recoup award – seek auditor review of draft clawback provision
17 Best Practice on Choice of Law and Venue30 November 2017 Best Practice on Choice of Law and Venue Specify governing law and choice of venue / forum for adjudication of disputes in the award agreement (and plan) Outside the U.S. Governing law provision may be crucial to ensure enforcement of award agreement provisions (e.g., treatment of awards upon termination, clawbacks) Choice of venue provision may deter employees from bringing claims in a foreign jurisdiction Inside U.S. Governing law provision promotes certainty of contract – though may be overridden by public policy Selection of issuer’s local venue reduces expenses, increases convenience May also specify forum (i.e., particular court or arbitrator)
18 Choice of Law and Venue Update30 November 2017 Choice of Law and Venue Update California Labor Code Section 925, effective 1/1/2017 Prohibits provisions in employment agreements that require California employees to adjudicate claims arising in California outside the state or without the substantive protection of California law Intended to prevent employers from circumventing California employment law protections, e.g., prohibition on non-competes Employees entitled to injunctive relief, other applicable remedies and attorneys’ fees Approaches? Argue the law does not apply to an equity award agreement – not a “condition of employment?” Argue claim against a non-California company does not “arise in California?” Include a carve-out, to the extent required for California employees Exception where employee represented by counsel
19 Include Company-Protective Provisions30 November 2017 Include Company-Protective Provisions Language Ensures that English version controls if a translation has been prepared and is different or ambiguous Compliance with Law Protects company where shares cannot be issued, etc. due to any applicable law (securities and other laws) Imposition of Other Requirements Provides flexibility to impose additional requirements if necessary or advisable (but may result in modification of award) Severability Reduces risk that unenforceability of one clause will result in unenforceability of entire agreement Waiver Addresses risk that the company’s non-enforcement of one provision will constitute a waiver of any other provision
20 Beware of “Tricky” Provisions30 November 2017 Beware of “Tricky” Provisions Exercise caution when drafting, implementing and enforcing the following provisions Retirement treatment (especially for RSUs) Certain termination and forfeiture provisions “Good Reason” definition Forfeiture for “Cause” or other “bad boy” provisions Non-compete / Non-solicit Beneficiary designations Restrictive Covenants Transferability provisions Repurchase rights / rights of first refusal
21 Address Award Acceptance30 November 2017 Address Award Acceptance Maximize the company’s ability to enforce agreement provisions Have a process for employees to accept awards Hard copy vs electronic acceptance Active or deemed acceptance Determine and implement a consistent approach for cases of failure to accept – and any permitted exceptions
22 International Updates
23 Chile – Changes to Tax Treatment of Options/ESPPBackground Historically, options/ESPP were taxed at sale if no reimbursement of equity award cost by Chilean employer Updates Effective January 1, 2017, options taxable at vesting (even if granted before 1/1/17) and possibly again at exercise ESPP likely taxable at purchase Still no withholding/reporting absent reimbursement
24 Chile – Changes to Tax Treatment of Options/ESPPAction Items for 2017 Grants Update tax information provided to employees If reimbursement, adjust withholding for option income to occur at vesting Consider granting only RSUs in Chile going forward
25 China – Updates on SAFE RequirementsBackground Under Circular 7, non-PRC public companies must seek approval from State Administration of Foreign Exchange (SAFE) for equity awards granted to “domestic individuals” working in China, followed by ongoing reporting obligations Filing in province where issuing company has legal subsidiary Updates Shanghai rejected application filing because applicant lacked “ties” to Shanghai Quotas restricted – challenge for ESPP operations U.S. issuer threatened with penalties for unauthorized fund transfer Broker changes
26 China – Updates on SAFE Approval RegimeAction Items for 2017 Grants If new applicant, be strategic about where to file and involve local contacts Ensure you, your local team and bank avoid unauthorized transfers of funds, particularly out of China For ESPP approvals, discuss flow of fund considerations with accounting teams as there may be delays due to quota restrictions Continued challenges related to inclusion / exclusion of non-PRC nationals If changes to broker / party wiring funds, recognize amendment application likely required Keep track of quarterly reporting and annual renewal obligations
27 Denmark – New Favorable Tax Regime for Equity AwardsUpdates New bill (re-)introduces favorable tax regime for equity awards granted to Danish employees (Section 7P regime) Applies to grants on or after July 1, 2016 Very similar to prior favorable tax regime (Section 7H regime) If applicable, tax deferred until sale of shares and gain taxed as capital gain (rather than employment income) No benefit to issuer or Danish employer (in fact, not able to take tax deduction if favorable regime applied)
28 Denmark – New Favorable Tax Regime for Equity AwardsRequirements Employee and employer must agree to apply regime Awards must be granted by employer or parent company Regime will apply only to shares with a value not exceeding 10% of employee’s annual salary (but no certification required) Awards may not be transferable or settled in cash For (currently only) options, employer must report agreements entered into with employees on monthly basis Action Items for 2017 Grants Evaluate if implementation of new favorable regime makes sense for company and employees
29 EU – Updates on EU Prospectus Directive30 November 2017 EU – Updates on EU Prospectus Directive Updates December 2016: EU agreed on final version of new EU Prospectus Regulation which will repeal and replace existing EU Prospectus Directive Pursuant to Regulation, even issuers not listed or incorporated in the EU will be able to rely on Employee Share Plan Exemption Will become effective 24 months after publication (expected to apply from June/July 2019) Action Items for 2017 Grants Continue filing EU prospectus until mid-2019 if cannot rely on exemption under Directive Look forward to 2019!
30 France – Changes to French-Qualified RSU RegimeBackground Free plan awards (i.e., Restricted Stock Units) granted in France that meet certain requirements may receive tax-qualified status in France For RSUs granted after September 28, 2012, there is a two-year minimum vesting period followed by a two-year sale restriction from each vesting date Under this regime, employer social tax is 30% of value of shares at grant
31 France – Changes to French-Qualified RSU RegimeUnder Macron regime (effective August 7, 2015), there is a one-year minimum vesting period and a two-year sale restriction from grant Under regime, employer social tax is 20% of value of shares at vesting For employees, entire gain could benefit from a reduction of 50% if the shares are held for more than 2 years or 65% if the shares are held for more than 8 years Regime can be applied only by companies that have plan or sub-plan approved by shareholders after August 7, 2015; otherwise, 2012 regime continues to apply
32 France – Changes to French-Qualified RSU RegimeUpdates Tax regime changed again effective December 30, 2016 Same vesting/sale restrictions as under Macron regime Under new regime, employer social tax is 30% of value of shares at vesting For gain up to €300,000/year, same employee tax treatment as under Macron regime For gain in excess of €300,000, same employee tax treatment as under 2012 regime (i.e., gain at vesting subject to progressive tax rate, no reduction for holding period) Applies to companies that have plan or sub-plan approved by shareholders after December 30, 2016; otherwise, 2012 regime or Macron regime continues to apply (depending on approval date of plan)
33 France – Changes to French-Qualified RSU RegimeAction Items for 2017 Grants If plan or sub-plan approved by shareholders after August 7, 2015, but before December 30, 2016, can continue to grant under the Macron regime until need to take plan back to shareholders If plan or sub-plan approved by shareholders before August 7, 2015, need to continue to grant under 2012 regime If currently granting non-qualified RSUs, likely not advisable to implement French- qualified plan because of instability of French tax regime for RSUs But exceptions could apply depending on specific circumstances May need to update tax information provided to employees
34 France – Constitutional Court Decision Permits Refunds - Qualified RSU RegimeUpdate In April 2017, French Constitutional Court ruled that employer can claim a refund of the payment of employer social tax at grant of qualified RSUs (under pre-Macron regime) if award later forfeited Likely limited to taxes paid during last 3 years Action Items Evaluate if paid employer social tax paid at grant for awards later forfeited Consider status of tax compliance by French entities in evaluating whether to file for refund
35 New Zealand – New Tax Reporting and Withholding Obligations for Equity AwardsBackground Currently, no employer withholding/reporting obligations for equity awards Updates New legislation requires monthly reporting of equity award income realized by NZ employees New legislation allows employer to withhold tax on equity award income through PAYE system Election is made by agreement between employee and employer Election is revocable It is intended that the decision to withhold is exercised on a per employee basis New rules become effective April 1, 2017 Proposal pending to also require annual reporting of equity award income
36 New Zealand – New Tax Reporting and Withholding Obligations for Equity AwardsAction Items for 2017 Grants Prepare for reporting obligation (first report due in May 2017 for equity award income realized in April 2017 (if any)) Stay tuned if annual reporting will apply Evaluate whether tax withholding beneficial to employees Would allow some employees to remain non-filing taxpayers
37 New Zealand – New Exemptions Under Financial Markets Conduct Act 2013Updates Transition period for implementing new securities law regime ended on December 1, 2016 Need to apply exemptions under Financial Markets Conduct Act 2013 (“FMCA”): Employee share scheme (“ESS”) exclusion Small offering exclusion, modeled after the “20-in-12” exemption in Australia On August 8, 2016, new exemption for “debt securities” established, which provides relief for holding payroll contributions for ESPP offering
38 New Zealand – New Exemptions Under Financial Markets Conduct Act 2013Action Items for 2017 Grants Review available exemptions under FMCA and corresponding requirements in light of current offerings Look at impact on RSUs (and other nil consideration awards) Consider conditions for ESPP payroll deduction feature Comply with requirements of any new exemption chosen May require inclusion of notice language in grant documents and/or filing of notice with regulator depending upon circumstances Can discontinue ongoing filing of financial statements (if relied on Overseas Issuer exemption under old regime)
39 Philippines – New Policy for Securities Registration ExemptionBackground Under Securities Regulation Code (“SRC”), registration and prospectus required to offer securities unless an exemption applies Offers under share plan to no more than 19 offerees within a 12-month period could qualify as exempt transaction under Section 10.1 of SRC Updates Under new SEC policy, Section 10.1 exemption no longer available for share plan offerings All share plan offerings now require confirmation of exemption under Section 10.2 Section 10.2 exemption confirmation involves cumbersome initial filing, annual reporting, filing fee payments, and new request for exemption to register additional shares
40 Philippines – New Policy for Securities Registration Exemption30 November 2017 Philippines – New Policy for Securities Registration Exemption Action Items for 2017 Grants Assess whether confirmation of exemption is required If already relying on Section 10.2 exemption, ensure compliance with year-end reporting requirements and filing fee payments Consider granting cash-settled awards as an alternative
41 UK – Brexit Impact on Equity AwardsUpdates On June 23, 2016, UK voted to exit from the EU, the so-called “Brexit” No immediate effect on offering of awards under employee share and other incentive plans in the UK and elsewhere in Europe It could be 2 years or more before any legislation affecting share and other incentive plans is changed Implications once UK withdraws from EU could include changes to: Securities laws (e.g., UK may no longer recognize exemptions currently available under EU Prospectus Directive) Data privacy laws Anti-discrimination laws
42 UK – Brexit Impact on Equity Awards30 November 2017 UK – Brexit Impact on Equity Awards Action Items for 2017 Grants Likely none Monitor developments in UK (Formal application for withdrawal under Article 50 of the Lisbon Treaty commenced on March 29, 2017 Last week’s UK parliamentary election impact?
43 Vietnam – State Bank Issues New Circular 10 on Foreign Direct InvestmentUpdates State Bank of Vietnam (SBV) Issued New “Circular 10” on Foreign Direct Investment Effective August 13, 2016, new registration and reporting requirements apply for offers of equity awards in Vietnam Circular 10 applies to Vietnamese nationals May allow for inclusion of foreign participants in registration, but unclear Circular permits employees to remit currency out of Vietnam, including amounts deducted from payroll (ESPP offering may be possible) Companies that already obtained SBV approval must re-register and new quarterly reporting replaces annual reports
44 Vietnam – State Bank Issues New Circular 10 on Foreign Direct InvestmentRequirements Likely Include Submission of application package (including registration form, documents proving legal status of the issuer and local entities, plan and award documents, list of eligible employees, etc.) Local entity must submit filing (unclear whether one entity can submit on behalf of all entities in Vietnam) Dedicated bank account required Quarterly reporting required
45 Vietnam – State Bank Issues New Circular 10 on Foreign Direct InvestmentAction Items for 2017 Grants Consider offering equity awards (including ESPP) in Vietnam For companies already offering equity awards in Vietnam, complete re-registration, open dedicated account, start completing quarterly reports and discontinue annual reporting
46 Questions?
47 Thank you Narendra Acharya, Partner [email protected]30 November 2017 Thank you Narendra Acharya, Partner Sinead Kelly, Partner
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