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
Agenda
 U.S. Updates
 Best Practices and Recommended Updates for Grant Documents
 International Updates
© 2017 Baker & McKenzie LLP
2
U.S. Updates
United States: Possible Tax Reform

2017 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Death tax would be repealed – no more gifting of awards for estate planning, or nonresident estate tax concerns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
© 2017 Baker & McKenzie LLP
4
United States: Dodd-Frank Act Changes
 Potential Changes to Dodd-Frank’s Executive Compensation Provisions

Financial Choice Act passed by House of Representatives last week
 Repeals:
1.
2.
3.

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:
1.
2.

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
© 2017 Baker & McKenzie LLP
5
United States: Plaintiff Shareholder Litigation

Director Compensation at Delaware Companies
 Avoid claims and preserve protection of “business judgment” review of director
compensation by including separate, director-specific award limit in shareholderapproved 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
© 2017 Baker & McKenzie LLP
6
Best Practices and Recommended
Updates for Grant Documents
Approaches for Global Equity Award Agreements
Country-Specific Agreements

US and Non-US Agreements (with country appendix)

Global Agreement (with country appendix)
All Grantees

© 2017 Baker & McKenzie LLP
Material Terms &
Conditions
General Non-US
Terms & Conditions
Country-Specific
Terms & Conditions
8
Global Award Agreement

Generally, 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
• Lengthy grant document /
difficult to read
• “Scary” – Lots of redundant
provisions for US
population?
• Tricky if deferrals or other
features not offered to nonUS employees
• Appendix for non-US
grantees including
international disclaimer
language
PROS
CONS
COMPROMISE
9
© 2017 Baker & McKenzie LLP
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…
Net
share
w/h
Cash
Payment
Plan
Provisions
Sell to
cover
Payroll
© 2017 Baker & McKenzie LLP
10
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 16b3(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
© 2017 Baker & McKenzie LLP
11
Tax Withholding Provisions Update (cont’d)
 Update “minimum” rate share withholding language per FASB Accounting
Standards Update 2016-09





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
© 2017 Baker & McKenzie LLP
12
Best Practice on Employment and Privacy Law
 Include provisions to protect company against common employment claims
outside the U.S.
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

Review and update data privacy notice / consent to reflect new and amended
laws and practices
© 2017 Baker & McKenzie LLP
13
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
© 2017 Baker & McKenzie LLP
14
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)
© 2017 Baker & McKenzie LLP
15
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
© 2017 Baker & McKenzie LLP
16
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)
© 2017 Baker & McKenzie LLP
17
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?




© 2017 Baker & McKenzie LLP
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
18
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
© 2017 Baker & McKenzie LLP
19
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
© 2017 Baker & McKenzie LLP
20
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
© 2017 Baker & McKenzie LLP
21
International Updates
Chile – Changes to Tax Treatment of
Options/ESPP

Background


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
© 2017 Baker & McKenzie LLP
Chile – Changes to Tax Treatment of
Options/ESPP

Action 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
© 2017 Baker & McKenzie LLP
China – Updates on SAFE Requirements


Background

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
© 2017 Baker & McKenzie LLP
China – Updates on SAFE Approval Regime

Action 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
© 2017 Baker & McKenzie LLP
Denmark – New Favorable Tax Regime
for Equity Awards
 Updates
•
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)
© 2017 Baker & McKenzie LLP
Denmark – New Favorable Tax Regime
for Equity Awards


Requirements

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
© 2017 Baker & McKenzie LLP
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!
© 2017 Baker & McKenzie LLP
France – Changes to French-Qualified RSU
Regime

Background

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
© 2017 Baker & McKenzie LLP
France – Changes to French-Qualified RSU
Regime

Under 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
© 2017 Baker & McKenzie LLP
France – Changes to French-Qualified RSU
Regime

Updates

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)
© 2017 Baker & McKenzie LLP
France – Changes to French-Qualified RSU
Regime

Action 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 Frenchqualified 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
© 2017 Baker & McKenzie LLP
France – Constitutional Court Decision
Permits Refunds - Qualified RSU Regime


Update

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
© 2017 Baker & McKenzie LLP
New Zealand – New Tax Reporting
and Withholding Obligations for Equity Awards

Background


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
© 2017 Baker & McKenzie LLP
New Zealand – New Tax Reporting
and Withholding Obligations for Equity Awards

Action 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
© 2017 Baker & McKenzie LLP
New Zealand – New Exemptions
Under Financial Markets Conduct Act 2013

Updates

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
© 2017 Baker & McKenzie LLP
New Zealand – New Exemptions
Under Financial Markets Conduct Act 2013

Action 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)
© 2017 Baker & McKenzie LLP
Philippines – New Policy for Securities
Registration Exemption

Background



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
© 2017 Baker & McKenzie LLP
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
© 2017 Baker & McKenzie LLP
UK – Brexit Impact on Equity Awards

Updates

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
© 2017 Baker & McKenzie LLP
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?
© 2017 Baker & McKenzie LLP
Vietnam – State Bank Issues
New Circular 10 on Foreign Direct Investment

Updates

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
© 2017 Baker & McKenzie LLP
Vietnam – State Bank Issues
New Circular 10 on Foreign Direct Investment

Requirements 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
© 2017 Baker & McKenzie LLP
Vietnam – State Bank Issues
New Circular 10 on Foreign Direct Investment

Action 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
© 2017 Baker & McKenzie LLP
Questions?
© 2017 Baker & McKenzie LLP
46
Thank you
Narendra Acharya, Partner
[email protected]
+1 312 861 2840
Sinead Kelly, Partner
[email protected]
+1 415 591 3241
© 2017 Baker & McKenzie LLP
47
© 2017 Baker & McKenzie LLP
48
Blogs Dedicated to Compensation
Recent Posts Include:
Recent Posts Include:
•
Post-Closing Application of Specified
Employee Rules
•
Oops, the French Did it Again…
•
Will ISS Give Your Stock Plan Proposal a
“Thumbs Down” If You Eliminate Minimum
Share Withholding Requirements?
•
Brave New World: Withholding in Shares
After Changes to ASC 718
•
Restrictive Covenants and Equity Awards:
Match Made in Heaven or Headed for
Divorce?
•
Don’t Lose Your Section 16(b) Exemption for
Share Withholding
© 2017 Baker & McKenzie LLP
49
Global Equity
Guidance On Demand
"Talking Stock," Baker & McKenzie's new podcast
series, explores the latest global equity issues that
pose the greatest risks, or present the greatest
opportunities, for your company’s global equity
program.
Each ten-minute episode provides key legal, tax and
regulatory takeaways your stock administration team
should keep in mind when making annual equity
compensation grants to employees in various
jurisdictions.
Available for download now:
© 2017 Baker & McKenzie LLP
50
www.bakermckenzie.com
Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms
around the world. In accordance with the common terminology used in professional service organizations, reference to a
"partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an
office of any such law firm. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results
do not guarantee a similar outcome.
© 2017 Baker & McKenzie LLP