United States. Employee Stock Purchase Plans. Employment. Regulatory. Labor Concerns. Communications. Securities Compliance

Transcription

1 United States Employee Stock Purchase Plans Employment Labor Concerns A claim for breach of contract could arise where a Plan is amended or discontinued. It is recommended that Plan provisions be drafted so as to preclude leased and/or temporary employees and independent contractors from claiming entitlements under the Plan (absent a specific intention to include these workers). Plans should be drafted to permit unilateral amendment or termination of the Plan, and employees should be required to acknowledge the discretionary nature of the Plan. Employers may not deny, directly or indirectly, employees the opportunity to participate in the Plan based on any prohibited grounds of discrimination, including, among others, race, color, religion, sex, national origin, citizenship, age, disability, uniformed service or any other status protected by federal, state or local law. Communications Plan documents should be translated into English unless the participant speaks the language in which the documents are written. Most government filings must be made in English (although certain documents may be filed with a summary in English). Generally, the electronic execution of agreements may be acceptable under certain conditions. Regulatory Securities Compliance Federal and state securities laws govern the grant of securities under employee benefit plans, including employee stock purchase plans. Under the US Securities Act of 1933 (the Securities Act ), unless an exemption is available, any offer or sale of a security must be registered with the US Securities and Exchange Commission (the SEC ). The SEC has created a special exemption and a special registration process for offers and sales of securities in connection with employee benefit plans: Reporting companies. Companies with a class of securities registered under the Securities Exchange Act of 1934 (the Exchange Act ) which includes, among others, companies listed on a US stock exchange are allowed to use a streamlined registration statement called a Form S-8. Form S-8 requires less disclosure than other SEC registration forms. To be eligible to use this form, the company must have filed all required reports during the preceding 12 months (or such shorter period as the company was required to file). The Form S-8 is filed with the SEC and is generally no more than ten pages long. Separate from the Form S-8, the company must deliver to employees a prospectus containing a description of the Plan, together with the company s most recent annual report.

2 Non-reporting companies. Private companies in the United States cannot use Form S-8. However, they are permitted to grant a limited amount of securities under employee benefit plans pursuant to a special exemption contained in Rule 701 under the Securities Act. There are no special information requirements for employees unless the value of securities issued in any 12-month period exceeds $5 million, at which point financial statements and other disclosure must be provided. Reporting and non-reporting companies can use other exemptions that are available under the Securities Act. For example, the exemption for the issuance of securities to accredited investors under Regulation D may be available for grants to executive officers. Failure to comply with registration or exemption requirements may give employees rescission rights or the right to sue for damages if they no longer own Stock. While the SEC is responsible for enforcing of the United States Federal securities laws, each individual state has its own securities laws, referred to as blue sky laws, and its own regulatory agency which administers the law, typically known as the state Securities Commissioner. Blue sky laws are often superseded by Federal law, particularly with respect to reporting companies, but they do apply to non-reporting companies. In addition, blue sky laws vary widely from state to state. Therefore, while most state blue sky laws have exemptions from registration for stock incentive plans that are exempt from federal registration, some do not, and a few require notice or a streamlined registration procedure. The laws of each state where any Plan participant resides must be checked prior to undertaking any securities offerings or sales in that state. Foreign Exchange Data Protection There are no exchange controls in the US. In the US there is no all-encompassing data protection law that covers the entire economy. Rather, there are sector-specific federal data protection laws, and each state has its own sector-specific data protection laws. Employers should obtain the employees express written consent as to the use and disclosure of their personal data. Such consent must be broad enough to cover any use or disclosure that will be made of the data. Further, any use or disclosure of the data should conform to any stated internal policies of the employer regarding the use and disclosure of the personal data of employees. Tax Employee Tax Treatment This section applies to rights granted under an employee stock purchase plan that satisfies the requirements of Section 423 of the Internal Revenue Code (as described under Tax-Favored Program below). No tax is payable upon grant of the right. Amounts deducted from the employee s compensation under the Plan during Plan offering periods are included in the employee s taxable ordinary income. When an employee exercises a right to purchase Stock under the Plan, the employee recognizes no immediate taxable income. If, however, the employee does not qualify for this favorable tax treatment (for either of the reasons described below), the employee will recognize taxable compensation income equal to the spread the excess of the value of the Stock received over the purchase price of the Stock when the employee exercises the right.

3 The employee s favorable tax treatment upon exercise of the purchase right can be lost in the following two circumstances. The first, a disqualifying disposition, occurs if the employee sells the Stock received upon the exercise of the right within two years after the date the right was granted or within one year after the date the right was exercised. In that circumstance, the employee recognizes the spread as taxable compensation income at the time of the disqualifying disposition. The second occurs if the employee was not employed by the employer at all times during the period beginning on the date the right was granted and ending on the date three months before the right is exercised. In that circumstance, the employee recognizes the spread as taxable compensation income at the time the employee exercises the right. Generally, when the employee sells Stock purchased upon exercise of a purchase right under the Plan, some or all of the gain is taxed as capital gain. The gain equals the excess of the sale price over the purchase price of the Stock, or, in the case of a disqualifying disposition, over the value of the Stock on the purchase date. If the sale of the Stock does not result in a disqualifying disposition, and if the purchase price payable upon exercise of the right is less than 100% of the Stock s fair market value at the time the right was granted, a portion of the gain will be taxed as ordinary income. The ordinary income portion of the gain equals the lesser of (a) the amount, if any, by which the Stock s fair market value when the right was granted exceeds the purchase price, determined as of the grant date, and (b) the amount, if any, by which the Stock s fair market value at the time of sale exceeds the purchase price paid. If the sale of the Stock does result in a disqualifying disposition, the entire amount of the gain is taxed as a capital gain. Social Insurance Contributions Tax Favored Program Withholding and Reporting Neither the exercise of a purchase right under the Plan nor a disposition of Stock (whether or not in a disqualifying disposition) is subject to social security contributions. Many employee stock purchase programs in the US are structured to comply with the requirements of Section 423 of the Internal Revenue Code, and afforded the tax treatment described above. Qualified employee stock purchase plans must, among other requirements, (1) be maintained only for employees, (2) be approved by shareholders, (3) offer securities with a purchase price not less than the lesser of 85% of the fair market value of the Stock at the beginning of the offering period and the end of the offering period, and (4) not permit an employee to purchase more than $25,000 worth of Stock (determined as of the grant date of the right) for each calendar year in which the offering period is in effect. Employee stock purchase plans that do not comply with Section 423 have the same tax consequences as nonqualified stock options, as described in the Stock Option Plans section. Neither the exercise of a purchase right under the Plan (as described under Employee Tax Treatment above) nor a disposition of Stock (whether or not in a disqualifying disposition) is subject to income tax withholding. However, income taxable upon a disqualifying disposition is reportable by the employer on Form W-2. Additionally, an employer that in the preceding year recorded the first transfer of legal title of Stock purchased by an employee under the Plan, if the purchase price of the Stock was (a) less than 100% of the fair market value of the Stock on the grant date or (b) not fixed or determinable on the grant date, must furnish the employee with a statement, and file a return with the Internal Revenue Service, that includes certain information concerning the employer, the employee, the purchase right and the Stock.

4 Employer Tax Treatment The employer does not receive a tax deduction when an employee exercises a right to purchase Stock under the Plan. However, if the employee does not qualify for the favorable tax treatment described above, the employer receives a tax deduction equal to the spread reported as taxable ordinary income by the employee, so long as the employer timely complies with the Form W-2 reporting requirements described above. Tax Rates Income tax is charged at rates of up to 39.6%. Statutory stock options are not subject to FICA (Social Security tax and Medicare tax) or FUTA (unemployment tax). Any gain made on the sale of shares held for more than a year is taxed at a capital gains rate of up to 20%, depending on the individual s total taxable income. Restricted Stock and RSUs Employment Labor Concerns A claim for breach of contract could arise where an equity incentive plan is amended or discontinued. It is recommended that Plan provisions be drafted so as to preclude leased and/or temporary employees and independent contractors from claiming entitlements under the Plan (absent a specific intention to include these workers). Plans should be drafted to permit unilateral amendment or termination of the Plan, and employees should be required to acknowledge the discretionary nature of the Plan. Employers may not deny, directly or indirectly, employees the opportunity to participate in the Plan based on any prohibited grounds of discrimination, including, among others, race, color, religion, sex, national origin, citizenship, age, disability, uniformed service or any other status protected by federal, state or local law. Communications Plan documents should be translated into English unless the participant speaks the language in which the documents are written. Most government filings must be made in English (although certain documents may be filed with a summary in English). Generally, the electronic execution agreements may be acceptable under certain conditions. Regulatory Securities Compliance Federal and state securities laws govern the grant of securities under employee benefit plans, including stock incentive plans. Under the US Securities Act of 1933 (the Securities Act ), unless an exemption is available, any offer or sale of a security must be registered with the US Securities and Exchange Commission (the SEC ). The SEC has created a special exemption and a special registration process for offers and sales of securities in connection with employee benefit plans:

5 Reporting companies. Companies with a class of securities registered under the Securities Exchange Act of 1934 (the Exchange Act ) - which includes, among others, companies listed on a US stock exchange - are allowed to use a streamlined registration statement called a Form S-8. Form S-8 requires less disclosure than other SEC registration forms. To be eligible to use this form, the company must have filed all required reports during the preceding 12 months (or such shorter period as the company was required to file). The Form S-8 is filed with the SEC and is generally no more than ten pages long. Separate from the Form S-8, the company must deliver to employees a prospectus containing a description of the Plan, together with the company s most recent annual report. Non-reporting companies. Private companies in the United States cannot use Form S-8. However, they are permitted to grant a limited amount of securities under employee benefit plans pursuant to a special exemption contained in Rule 701 under the Securities Act. There are no special information requirements for employees unless the value of securities issued in any 12-month period exceeds $5 million, at which point financial statements and other disclosure must be provided. Reporting and non-reporting companies can use other exemptions that are available under the Securities Act. For example, the exemption for the issuance of securities to accredited investors under Regulation D may be available for grants to executive officers. Failure to comply with registration or exemption requirements may give employees rescission rights or the right to sue for damages if they no longer own Stock. While the SEC is responsible for enforcing of the United States Federal securities laws, each individual state has its own securities laws, referred to as blue sky laws, and its own regulatory agency which administers the law, typically known as the state Securities Commissioner. Blue sky laws are often superseded by Federal law, particularly with respect to reporting companies, but they do continue to apply to non-reporting companies. In addition, blue sky laws vary widely from state to state. Therefore, while most state blue sky laws have exemptions from registration for stock incentive plans that are exempt from federal registration, some do not, and a few require notice or a streamlined registration procedure. The laws of each state where any Plan participant resides must be checked prior to undertaking any securities offerings or sales in that state. Foreign Exchange Data Protection There are no exchange controls in the US. The US has no omnibus data protection law that reaches all personal data. Rather, it has a patchwork of sector-specific state and federal laws that regulate only certain classes of data. Outside the healthcare and background-check contexts, much employee information falls beyond the reach of these sector-specific laws. Nevertheless, a best practice in administering equity/benefit plans is to build into Plan enrollment forms a written consent; Plan participants should expressly authorize the use and disclosure of their data for all Plan purposes. Also, Plan administrators must comply with any privacy policy of a sponsor employer, and with document-retention laws that mandate retaining tax-related information for certain periods.

6 Tax Employee Tax Treatment An employee will not recognize any taxable income upon the award of restricted stock which is not transferable and is subject to a substantial risk of forfeiture, unless the employee makes the election described below. Dividends paid with respect to restricted stock prior to the lapse of restrictions applicable to that restricted stock will be taxable as compensation income to the employee. Generally, the employee will recognize taxable ordinary income at the first time that Stock becomes transferable or is no longer subject to a substantial risk of forfeiture, in an amount equal to the fair market value of that Stock when the restrictions lapse. However, an employee may elect to recognize the fair market value of the restricted stock on the award date as taxable ordinary income upon the award date. If an employee makes this election, any dividends paid with respect to that restricted stock will not be treated as compensation income, but rather as dividend income, and the employee will not recognize additional taxable income when the restrictions applicable to his or her restricted stock award lapse. When the employee disposes of the Stock after it has vested, any amount received in excess of the fair market value of the Stock at the time the restrictions previously lapsed (or the fair market value of the Stock on the award date if the employee has made the election described above) will be taxed as capital gains. The granting of RSUs does not result in taxable income to the employee who receives the RSUs. The amount of cash paid or the then-current fair market value of the Stock received upon settlement of the RSUs is taxable to the employee as ordinary income. When the employee disposes of any Stock so received, any amounts received in excess of the fair market value of that Stock at the time of receipt will be taxed as capital gains. Social Insurance Contributions Amounts taxable upon the lapse of restrictions applicable to restricted stock awards, or taxable earlier if the employee elects to be taxed on the award date, are subject to social security contributions to the extent the employee has not exceeded the applicable wage base. Upon vesting of RSUs, the thencurrent fair market value of the Stock subject to the vested RSUs is subject to social security contributions to the extent the employee has not exceeded the applicable wage base. The employer is required to withhold the employee s portion of the social security taxes. The employer must then pay the employee s withholdings and the employer s contributions at the time the employee receives the earnings. Tax Favored Program Withholding and Reporting None. Amounts taxable upon the lapse of restrictions applicable to restricted stock awards, or taxable earlier if the employee elects to be taxed on the award date, are subject to income tax withholding and reporting by the employer. Also, the amount of dividends received with respect to non-vested restricted stock, unless the employee elected to be taxed on the value of the Stock on the award date, is subject to income tax withholding and reporting by the employer. Amounts taxable upon the settlement of RSUs are subject to income tax withholding and reporting by the employer.

7 Employer Tax Treatment Assuming compliance with the applicable income tax withholding and reporting requirements, the employer will be entitled to a tax deduction equal to the amount of ordinary income recognized by an employee in connection with his or her restricted stock award in the employer s taxable year in which that employee recognizes that ordinary income. The employer is also generally entitled to a tax deduction for any dividends that are paid on non-vested restricted stock if the employee has not elected to be taxed on the value of the Stock on the award date. The granting of RSUs does not result in a tax deduction for the employer. The amount of cash paid or the then-current fair market value of any Stock received upon settlement of the RSUs is deductible by the employer. Tax Rates Income tax is charged at rates of up to 39.6%. Social Security taxes may be levied on the employee at rate of 6.2% on the amount recognized as income under the Plan, up to the wage base limit ($118,500 for 2016). A Medicare tax is also levied on the employee at a rate of 1.45%, up to the wage base limit. Note there may be an additional Medicare tax of 0.9% for wages in excess of $200,000. Any gain made on the sale of shares held for more than a year is taxed at a capital gains rate of up to 20%, depending on the individual s total taxable income. Where taxes arise for the employer, these are levied at the following rates: Social Security Tax taxed at a rate 6.2% of the amount recognized as income under the Plan, up to the wage base limit for each employee ($118,500 for 2016). Medicare Tax taxed at a rate of 1.45% and applies to all wages (i.e. without regard to the wage base limit). Federal Unemployment Tax ( FUTA ) taxed at a rate 6.0%, up to a wage limit of $7,000 for Stock Option Plans Employment Labor Concerns A claim for breach of contract could arise where an equity incentive plan is amended or discontinued. It is recommended that Plan provisions be drafted so as to preclude leased and/or temporary employees and independent contractors from claiming entitlements under the Plan (absent a specific intention to include these workers). Plans should be drafted to permit unilateral amendment or termination of the Plan, and employees should be required to acknowledge the discretionary nature of the Plan. Employers may not deny, directly or indirectly, employees the opportunity to participate in the Plan based on any prohibited grounds of discrimination, including, among others, race, color, religion, sex, national origin, citizenship, age, disability, uniformed service or any other status protected by federal, state or local law.

8 Communications Plan documents should be translated into English unless the participant speaks the language in which the documents are written. Most government filings must be made in English (although certain documents may be filed with a summary in English). Generally, the electronic execution of agreements may be acceptable under certain conditions. Regulatory Securities Compliance Federal and state securities laws govern the grant of securities under employee benefit plans, including stock incentive plans. Under the US Securities Act of 1933 (the Securities Act ), unless an exemption is available, any offer or sale of a security must be registered with the US Securities and Exchange Commission (the SEC ). Note that the grant of an option is generally not considered to be a sale of either the option or the underlying security; however, the exercise of an option is considered to be a sale of the underlying security. The SEC has created a special exemption and a special registration process for offers and sales of securities in connection with employee benefit plans: Reporting companies. Companies with a class of securities registered under the Securities Exchange Act of 1934 (the Exchange Act ) which includes, among others, companies listed on a US stock exchange are allowed to use a streamlined registration statement called a Form S-8. Form S-8 requires less disclosure than other SEC registration forms. To be eligible to use this form, the company must have filed all required reports during the preceding 12 months (or such shorter period as the company was required to file). The Form S-8 is filed with the SEC and is generally no more than ten pages long. Separate from the Form S-8, the company must deliver to employees a prospectus containing a description of the Plan, together with the company s most recent annual report. Non-reporting companies. Private companies in the United States cannot use Form S-8. However, they are permitted to grant a limited amount of securities under employee benefit plans pursuant to a special exemption contained in Rule 701 under the Securities Act. There are no special information requirements for employees unless the value of securities issued in any 12-month period exceeds $5 million, at which point financial statements and other disclosure must be provided. Reporting and non-reporting companies can use other exemptions that are available under the Securities Act. For example, the exemption for the issuance of securities to accredited investors under Regulation D may be available for grants to executive officers. Failure to comply with registration or exemption requirements may give employees rescission rights or the right to sue for damages if they no longer own Stock. While the SEC is responsible for enforcing of the United States Federal securities laws, each individual state has its own securities laws, referred to as blue sky laws, and its own regulatory agency which administers the law, typically known as the state Securities Commissioner. Blue sky laws are often superseded by Federal law, particularly with respect to reporting companies, but they do apply to non-reporting companies. In addition, blue sky laws vary widely from state to state. Therefore, while most state blue sky laws have exemptions from registration for stock incentive plans that are exempt from federal registration, some do not, and a few require notice or a streamlined registration procedure. The laws of each state where any Plan participant resides must be checked prior to undertaking any securities offerings or sales in that state.

9 Foreign Exchange Data Protection There are no exchange controls in the US. The US has no omnibus data protection law that reaches all personal data. Rather, it has a patchwork of sector-specific state and federal laws that regulate only certain classes of data. Outside the healthcare and background-check contexts, much employee information falls beyond the reach of these sector-specific laws. Nevertheless, a best practice in administering equity/benefit plans is to build into Plan enrolment forms a written consent; Plan participants should expressly authorize the use and disclosure of their data for all Plan purposes. Also, Plan administrators must comply with any privacy policy of a sponsor employer, and with document-retention laws that mandate retaining tax-related information for certain periods. Tax Employee Tax Treatment Social Insurance Contributions Tax Favored Program Employee stock options are classified as either incentive stock options, which are intended to qualify with the requirements of Section 422 of the Internal Revenue Code, or options other than incentive stock options, which are not intended to so qualify (referred to as nonqualified stock options ). The grant of an option with an exercise price at least equal to the fair market value of the underlying Stock as at the date of grant is not a taxable event. However, the transfer of Stock to an employee upon exercise of his or her option may or may not give rise to taxable income to the employee depending upon whether the option is a nonqualified stock option or an incentive stock option. The exercise of a nonqualified stock option by an employee generally results in immediate recognition of taxable ordinary income by the employee in the amount by which the fair market value of the Stock purchased, on the exercise date, exceeds the aggregate exercise price paid. Any appreciation or depreciation in the fair market value of that Stock after the exercise date will generally result in a capital gain or loss to the employee at the time he or she disposes of the Stock. Amounts taxable upon the exercise of nonqualified stock options are subject to social security contributions to the extent the employee has not exceeded the applicable wage base. The employer is required to withhold the employee s portion of the social security taxes. The employer must then pay the employee s withholdings and the employer s contributions at the time the employee receives the earnings. Neither the exercise of an incentive stock option nor a disposition of Stock purchased under an incentive stock option (whether or not in a disqualifying disposition (described below)) is subject to social security contributions. The exercise of an incentive stock option by an employee is exempt from income tax, although not from the alternative minimum tax, if the employee has been an employee of the employer at all times beginning with the option grant date and ending three months before the date the employee exercises the option (or twelve months in the case of termination of employment due to disability). If the employee has not been so employed during that time, the employee will be taxed as described above for nonqualified stock options. If the employee disposes of the Stock purchased more than two years after the option was granted and more than one year after the option was exercised, then the employee will recognize any gain or loss upon disposition of that Stock as capital gain or loss.

10 However, if the employee disposes of the Stock prior to satisfying these holding periods (known as a disqualifying disposition ), the employee will be obligated to report as taxable ordinary income for the year in which that disposition occurs the excess, with certain adjustments, of the fair market value of the Stock disposed of, on the date the incentive stock option was exercised, over the exercise price paid for the Stock. Any additional gain realized by the employee on the disqualifying disposition would be a capital gain. If the total amount realized in a disqualifying disposition is less than the exercise price of the incentive stock option, the difference would be a capital loss for the employee. If an employee s incentive stock option becomes exercisable for the first time in any calendar year for Stock with a fair market value in excess of $100,000, determined as of the grant date of the option, the employee will be taxed on exercise of the option as described above for nonqualified stock options to the extent of this excess. Withholding and Reporting Amounts taxable upon the exercise of nonqualified stock options are subject to income tax withholding and reporting by the employer on Form W-2. Neither the exercise of an incentive stock option nor a disposition of Stock purchased under an incentive stock option (whether or not in a disqualifying disposition) is subject to income tax withholding. However, income taxable upon a disqualifying disposition is reportable by the employer on Form W-2. Additionally, an employer that in the preceding year transferred Stock to an employee upon the employee s exercise of an incentive stock option, must furnish the employee with a statement, and file a return with the Internal Revenue Service, that includes certain information concerning the employer, the employee, the incentive stock option and the Stock. Employer Tax Treatment The exercise of a nonqualified stock option by an employee results in a tax deduction for the employer equal to the amount of ordinary income reported by the employee. The exercise of an incentive stock option by an employee does not result in a tax deduction for the employer. If the employee disposes of the Stock purchased upon exercise of an incentive stock option in a disqualifying disposition, however, the employer is entitled to a tax deduction equal to the amount of ordinary income reported by the employee. In each case, the employer s tax deduction is conditioned on the employer s timely compliance with the Form W-2 reporting requirements described above.

11 Tax Rates Income tax is charged at rates of up to 39.6%. For nonqualified stock options, Social Security taxes may be levied on the employee at a rate of 6.2% on the amount recognized as income under the Plan, up to the wage base limit ($118,500 for 2016). A Medicare tax is also levied at a rate of 1.45%, up to the wage base limit. Note there may an Additional Medicare tax of 0.9% for wages in excess of $200,000. Any gain made on the sale of shares held for more than a year is taxed at a capital gains rate of up to 20%, depending on the individual s total taxable income. Where taxes arise for the employer, these are levied at the following rates: Social Security Tax taxed at a rate 6.2% of the amount recognized as income under the Plan, up to the wage base limit for each employee ($118,500 for 2016). Medicare Tax taxed at a rate of 1.45% and applies to all wages (i.e. without regard to the wage base limit). Federal Unemployment Tax ( FUTA ) taxed at a rate 6.0%, up to a wage limit of $7,000 for Statutory stock options are not subject to Social Security, Medicare or FUTA taxes. whitecase.com In this publication, White & Case means the international legal practice comprising White & Case llp, a New York State registered limited liability partnership, White & Case llp, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.this publication is prepared for the general information of our clients and other interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice. This summary is intended to reflect local law and practice as at 1 September Please note, however, that recent amendments and legal interpretations of the local law may not be included in these summaries. In addition, corporate governance, administration, and plan design facts that are specific to your company may impact how the local laws affect the company s equity based compensation plans. With these matters in mind, companies should not rely on the information provided in this summary when implementing their stock plans. Capitalised terms used in this report which are not otherwise defined shall have the meanings assigned to them in the Glossary, which can be accessed from the Countries at a Glance page on the White & Case LLP website. Attorney Advertising. Prior results do not guarantee a similar outcome. NY1016/ECBEL/M/314460_03