GLOBAL EQUITY PROGRAMS

1
GLOBAL EQUITY PROGRAMS
2
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

3
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

4
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

5
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 companys 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)

6
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

7
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
• Alternativean individual with over 1 million in
  assets (including value of home)

8
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.

9
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

10
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

11
US ISSUER GLOBAL EQUITY PROGRAMS

• 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

12
US ISSUER GLOBAL EQUITY PROGRAMS

• 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

13
US ISSUER GLOBAL EQUITY PROGRAMS

• 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

14
US ISSUER GLOBAL EQUITY PROGRAMS

• 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

15
US ISSUER GLOBAL EQUITY PROGRAMS

• 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

16
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

17
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

18
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

19
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.

20
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 regulationsexceptions 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 appliesnecessary to amend the
  foreign arrangement to comply with Section 409A
  requirements by 12/31/08.

21
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

22
GLOBAL AWARD AGREEMENTS

• Usually Governed by Law of Parent Companys
  (Issuers) Jurisdiction
• Award Agreements Often Contain Clawbacks for
  violations of restrictive Covenants
• Non-Solicitation
• Non-compete
• Required disclosure

23
GLOBAL AWARD AGREEMENTS

• 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. JH Marsh McLennan (Services)
  Ltd.

24
GLOBAL AWARD AGREEMENTS

• 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