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ESPPs – 423, 6039 and Global Employees: A Practical Review Boston Chapter NASPP Meeting August 17, 2010 Valerie Diamond - firstname.lastname@example.org Barbara Klementz - email@example.com
Agenda Introduction 423 Regulations Key Changes Applying Final Regulations to Solve Challenges for Global ESPPs 6039 Regulations
Introduction Baker & McKenzie and Global ESPPs Assisted 500+ companies (including 26 of the Fortune 100 companies) with rollout of global equity plans, including ESPPs Pioneered omnibus plan approach to facilitate offering of 423 ESPPs to non-US employees Commented in depth on new 423 and 6039 regulations
Final 423 Regulations Issued for publication November 16, 2009 Effective for offerings commencing on or after January 1, 2010 May electively apply to prior offerings
Final 423 Regulations Key Changes Reiterated and clarified “grant date” issues Introduced flexibility in applying employee coverage and equal rights privileges requirements through concept of “separate offerings” by entity
Final 423 Regulations Grant Date Why is “grant date” important for ESPPs? Allows lookback to beginning of offering period for “lower of” 85% price Starts two-year holding period for disqualifying disposition purposes Determines FMV of shares for calculating $25,000 limit
Final 423 Regulations Grant Date How to make sure beginning of offering period is grant date: State maximum number of shares any employee can purchase (e.g., 1,000 shares). Number does not have to be realistic. Provide a formula that fixes maximum number of shares for each offering period Could be determined by Board/Committee resolution (i.e., may not have to be set in plan document) If no maximum number of shares fixed, then grant date is considered to be purchase date
Final 423 Regulations Excludable Employees (less than two years service, 20 or less hours per week/less than 5 months per year, highly compensated employees) “Lesser included” approach to exclusions is permitted: E.g., Okay to exclude only top officers (lesser included group of highly compensated employees) But – must apply uniformly across all participating employers in the same “offering” (more restrictive than 401(k) rules) Limited Exceptions: Okay to exclude if participation by group of employees (e.g., in a particular country) is illegal or if compliance with the law of the foreign jurisdiction would cause the plan to violate Section 423
Final 423 Regulations Equal Rights and Privileges Proposed Regulations were quite restrictive Applied across corporate entities, not entity-by-entity approach Could exclude all employees in a separate corporate entity (be careful with check-the-box disregarded entities), but could not apply different rules across entities unless treating non-U.S. employees less favorably is necessary to comply with foreign law
Final 423 Regulations New Separate Offering Concept in Final Regulations Permits consecutive or overlapping “offerings” to groupings of one or more separate corporate entities within the corporate group (e.g., one offering to U.S. parent, one offering to subsidiaries in Europe, etc.) This permits variations in terms among corporate entities for same offering/purchase period Can use to solve excludable employee and equal rights and privileges problems
Final 423 Regulations Key Requirements for Each Separate Offering Each offering must encompass one or more entities that qualify as a “parent” or “subsidiary” as defined in Code section 424(e) and 424(f) Within each offering, employee coverage and equal rights and privileges requirements must be met
Final 423 Regulations Example of Separate Offerings For U.S. parent, offering excludes part-time (< 20 hour per week employees) and allows only payroll deductions For European subsidiaries, offering includes part-time employees due to EU Part-time Directive For Hong Kong and Argentine subsidiaries, no payroll deductions permitted, only direct contributions
Final 423 Regulations How to Make Offerings “Separate” Could spell out in plan document For each offering period, unless otherwise specified by the Committee, a separate offering will be made to the Company and each Participating Subsidiary Could accomplish this by Board or Committee resolution (review Plan authorization language) Additional Plan language may be desirable to permit acceptable variation in terms among the separate offerings
Final 423 Regulations Applying the Final Regulations to Solve (Some) Global Challenges for ESPPs What are problems? Potential solutions
Final 423 Regulations Global Challenges for ESPPs Difficult/costly securities/exchange control filings required (e.g., China, EU, Japan) Compensation definition inadequate (e.g., 13th month salary) Exclusion of part-time or fixed term employees (e.g., EU directive prohibits discrimination) Payroll deductions not permitted (e.g., Hong Kong)
Final 423 Regulations Global Challenges for ESPPs (cont’d) Separate bank account/interest required (e.g., Austria, Australia) Imposition of holding periods for tax benefit (e.g., Israel) Check-the-box flow through structures not meeting 424(f)
Final 423 Regulations Approaches to Date Exclude if illegal to offer plan in country If separate non-US sub, exclude sub as participating entity Create Plan Design to Manage Non-423 Offering Omnibus ESPP design (423 and non-423 component) 423 plans with non-423 or foreign sub-plans Two plans: one 423 and one non-423
Final 423 Regulations Approach after Final Regulations (Using Separate Offering Concept) Allows different terms for different entities without violating equal rights and privileges clause Avoids that operational failure within one entity taints entire ESPP offering Allows more entities to participate in the 423 ESPP (helpful for U.S. expatriate employees employed with non-US entities)
Final 423 Regulations Step one: Draft plan as broad as possible. Determine on a corporate entity-by-entity approach where local variations required Step two: Designate the separate offerings and the specific terms applicable to each separate offering Step three: Be sure appropriate Plan, Board or Committee resolutions correctly document the separate offerings
Final 423 Regulations Step four: Consider if still need non-423 component/sub-plan to solve check-the-box/branch office issue If so, designate relevant entities as participating in the non-423 plan Note: These will not normally vary from offering period to offering period, so can have “continuing” resolutions until changed
Final 6039 Regulations Background Section 6039 requires (1) employee information statements and (2) returns to the IRS to be issued by companies granting ISOs or tax-qualified ESPPs These requirements are separate from, and in addition to, Form W-2 reporting required under Code Section 6051
Final 6039 Regulations Background Obligation to file return with the IRS was waived for all transactions prior to January 1, 2010 But still need to provide information statement to employees for earlier years IRS returns to be filed on Form 3921 (ISOs) and Form 3922 (ESPPs) Electronic returns required if filing 250 or more forms Deadline for return likely March 1 for paper filers and March 31 for electronic filers (penalties for later filers!)
Final 6039 Regulations Transfers to be Reported For public companies where upon purchase ESPP shares are immediately deposited with a brokerage account established on behalf of the employee, the transfer on the purchase date has to be reported on Form 3922 Regulations provide for deposit of shares into brokerage account as triggering event (which could be a few days after actual purchase date) However, preamble to regs and IRS comments make it clear that purchase date supposed to be triggering event
Final 6039 Regulations Transfers to be Reported (cont’d) In other cases, e.g., if share certificate issued to employee or recorded in employee’s name in book entry form, then subsequent transfer by employee is reportable transfer Subsequent transfer could be sale of shares or transfer of legal title to a brokerage account Multiple statements/returns required if more than one purchase per year?
Final 6039 Regulations No Form 3922 required with respect to a nonresident alien to whom the corporation is not required to provide a Form W-2 for any calendar year between grant date and transfer
Final 6039 Regulations Additional information required to be provided in employee information statements (and IRS return) for transactions in 2010 and beyond Can rely on old regulations for transactions before January 1, 2010 Electronic delivery of statements is permissible (but very difficult to meet all requirements) Companies can (but are not required to) deliver copy of Form 3922 to employees to satisfy information statement requirement
Contact Information • Valerie Diamond Partner, San Francisco Office+ 1 415 576 firstname.lastname@example.org • Barbara KlementzPartner, San Francisco Office+ 1 415 591 email@example.com