1 Global Stock Plans Legal, Tax, Design and Regulatory Issues Bob Grayson, Senior Solicitor, Linklaters, London Carine Schneider, Partner, PricewaterhouseCoopers

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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.


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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!


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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


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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


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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)


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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


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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


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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


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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)


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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


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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.


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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?


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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


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Securities Laws


Finland - good news

• Offer to present or former employees


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Securities Laws


Kenya - getting worse

• Less than 100 people

• “Sufficiently knowledgeable to understand risks”


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Securities Laws

China

Existing shares - not regulated

New issue shares - no guidance

Result?

• avoid China

• offshore transactions

• cash plans


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Communications

• Chosen language?

• Chosen medium?

• Chosen style and content?

• Argentina - new digital signature law

• China - no special legislation


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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


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Exchange Controls

• Prohibitions

• Consent

• Notifications

• Free flow


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Exchange Controls

• China - very restrictive

• Argentina - crisis response

• Romania - prohibition notification

• Slovakia - consent free flow


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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


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Data Protection

• Consent

• Informed Consent

• Licensing/Registration

• Prohibition unless “adequate protection”

• China

• Thailand


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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


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Labour Laws

• Impact on employment contract - “acquired rights”

• Termination rights

• Spain “salary in cash”

• Pension rights

• Works Councils


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Banking and Broking

• Global providers

• Who is responsible?

• Salary deductions


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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]


Documents

1 Global Stock Plans Legal, Tax, Design and Regulatory Issues Bob Grayson, Senior Solicitor, Linklaters, London Carine Schneider, Partner, PricewaterhouseCoopers