Conception to Implementation: Introducing a non-us Equity Plan into the US Successfully

Transcription

1 SESSION 1.3 Conception to Implementation: Introducing a non-us Equity Plan into the US Successfully Patrick Hajovsky Senior Attorney, BP America Inc. Jane Klewin Senior Attorney, BP America Inc. Peter Vassallo Reward Director Equity Plans, BP plc

2 SESSION 1.3 Conception to Implementation: Introducing a non-us Equity Plan into the US Successfully Today s Presenters Patrick Hajovsky Senior Attorney, BP America Inc. Jane Klewin Senior Attorney, BP America Inc. Peter Vassallo Reward Director Equity Plans, BP plc 2

3 Agenda Background to BP s existing equity plans Designing the new plan from a Reward perspective Next steps - US issues to consider SEC issues including registration Addressing Section 162(m) Early FICA taxation Drafting the plan rules Communicating with participants Effect of Section 409A on implementation 3 Background to BP s existing equity plans In 2008, BP operated two restricted share unit plans for Group Leaders One time-based vesting, one performance-vesting Both with grants based on past performance Group Leader population was around 650, with just under 50% in the US Both plans were essentially for retention purposes and did not excite the participants 4

4 Designing the new plan from a Reward perspective Grant amounts based on future value to the company i.e., forward-looking rather than based on past performance Incentive rather than retention Automatic lapse for termination in year of grant Standard UK provisions for termination Qualifying leavers get to retain unvested grants Change of control of employer Redundancy Retirement Disability/ill-health Death of participant leads to automatic vesting and release 5 Next steps US issues to consider After agreeing on design parameters from a Reward perspective, we went to BP US Legal to garner advice on design considerations before finalising any decisions on structure We needed to consider the US securities laws... 6

5 US Securities Laws Considerations Is registration of the plan with the SEC required? Is there a security? If not, no registration Is there a sale? If not, no registration no-sale theory bonus stock new plan design issues If there is a security and a sale, is there an exemption from registration with the SEC? If not, no registration Note: The new plan satisfied the no-sale theory so no SEC registration was required. 7 Registration with the SEC Registration Statement If an exemption from registration can t be found then the plan must be registered Securities law liability for company Form S-8 is filed with SEC Plan rules an exhibit Board of Directors approval US Authorized Representative Keeping track of ADRs/shares used 8

6 Registration with the SEC Prospectus Prospectus not filed with the SEC but must be delivered to participants Must contain certain information that does not need to be delivered to employees in the rest of the world Need for US-specific communications Securities law liability for the company Prospectus must be in plain English clear concise and understandable 9 Next steps US issues to consider (cont.) Having determined the US securities laws considerations of the proposed plan and considered plan adjustments/clarifications accordingly, we asked if there were any other US design considerations 10

7 Possible effect of Code Section 162(m) Section 162(m) US public companies may only deduct compensation up to a maximum of $1 million for CEO and 4 highest paid officers This limit is n/a for non-public entities Includes payment of wages, bonuses, most fringe benefits, income from stock option exercise and the value of any other property. So not just W-2 compensation Excluded are health insurance, 401(k), commissions and performance based compensation. This means performance based compensation can be deducted by the employer, even if the total compensation to each of the 5 employees exceeds $1 million annually. A useful feature for plans.if they meet the design criteria! 11 Possible effect of Code Section 162(m) Section 162(m) offers 4 criteria for performance based compensation to be considered tax-deductible: 1. Paid solely because of the executive s attainment of one or more pre-established and objective performance goals; 2. The goals are established by a compensation committee consisting solely of two or more outside directors; 3. Material terms of the goals are disclosed and approved by the shareholders; and 4. The compensation committee certifies that the goals have been established. This is an alien concept to many international plan designers (pun intended). 12

8 Possible effect of Code Section 162(m) Section 162(m), continued Special rules for stock options and stock appreciation rights (SARs): 1. Compensation committee must make the grant; 2. The compensation program governing the award of stock options must state the maximum number of options that can be awarded during the stated time period; and 3. The exercise price of the stock option must be at least equal to the stock s fair market value at the time of the option grant. A failure to satisfy ANY of the 162(m) criteria will result in loss of deductibility for the compensation. 13 US issues to consider Early FICA taxation Initially the desire was to have plan lapse if termination occurred within year of grant This objective was modified, so the automatic lapse was removed However, removing the possibility of lapse for termination in year of grant leads to early FICA taxation for retirement-eligible participants Retain automatic lapse for individuals who meet retirement criteria 14

9 Drafting the plan rules Initial set of plan rules drafted by BP Legal UK To ensure compliance with UK law Reviewed by BP Reward UK To ensure rules reflect desired structure Reviewed by BP Legal US To ensure compliance with US law Creation of US-specific schedule within plan rules to deal with US requirements Reviewed by external legal advisors in UK To ensure overall consistency with existing plans 15 Communicating with participants Historically BP had a fairly scattered approach to providing information to participants Different countries used different media and content We moved to a centralised approach with strong control of content One intranet site with control over access to changing content Plan summaries created for participants Savings clause All participants have to be able to access the information easily we stick to two-click rule where possible Participant communications subject to US Rule 10b-5 16

10 Effect of Section 409A on implementation Section 409A A plan provides for deferral of compensation if a service provider (generally, an employee or independent contractor) has a legally binding right during a taxable year to receive compensation that, pursuant to its terms, is or may be payable to (or on behalf of) the service provider in a future year. Compensation is NOT deferred if NOT subject to a substantial risk of forfeiture. Primarily affects multinational plans by using different definitions of qualifying early distribution events. Change in control Disability Separation from service Retirement Specified time of payment or time period to make payment 17 Effect of Section 409A on implementation Early Distributions upon. A change in control At least 30% of change in stock ownership, and leaving must take place within 2 years of change. Not just a change in management, responsibilities or roles. Many plans and employment agreements do not contain a 409A qualifying definition, and IRS recently held they will insist on word for word compliance with the regulations. A disability Must be a total and permanent disability (i.e., unable to do any job, not just the job they had at the time) Is this consistent with your LTD policies? 18

11 Effect of Section 409A on implementation Early distributions upon. A separation of service Did one actually take place within the 409A definition? 0 20% of work performed after event? Termination 20% - 50% of work performed after event? Facts and circumstances. Over 50% of work performed after event? NO termination A retirement with the consent of the company If an EE can decide when she retires, doesn t she now have control? Did somebody just vest without retiring? Probably Yes to both. A specified time or fixed payment The plan can specify a fixed payment or a specified time period to pay post-termination. If the time period is greater than 90 days, penalties apply. 19 Section 409A penalties Why is this implementation (and design) feature important? Section 409A penalties can be harsh! Amounts not subject to SR of F are includible in income now even though the employee has not yet received the money. Same amounts subject to a penalty tax of 20% plus interest from date of payment. States such as California also impose income taxes and a separate 20% penalty tax (above and beyond the federal penalty tax). Accordingly, an employee could end up losing 85% or more of an improper payment to taxing authorities. Employers are liable for tax reporting and withholding Employers are NOT permitted to make the employee whole, even if the implementation/design defect is the employer s fault. 20

12 Thank you Patrick Hajovsky, Jane Klewin, Peter Vassallo, 21