Due Diligence Is First Task for Employers Granting Equity Worldwide, Speakers Say

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By Mary Hughes

Sept. 16 — Designing an equity-based compensation program for global employees requires an employer to perform due diligence in each jurisdiction, focusing on employment law, securities, corporate and tax law, and the general legal ramifications of operating such programs, speakers said during a recent conference on executive compensation.

Unlike the U.S., many jurisdictions have extremely stringent rules on how employers can use data and personal information of plan participants, said Robin M. Quittell, a managing director at Fortress Investment Group in New York.

Employers may hire a third party to run their equity programs, but in some jurisdictions, they “may be precluded from passing along personal information” or even transmitting data across country lines, she said at the Sept. 12 conference.

To the extent an employer can surmount these obstacles, it has to understand consent rules required in handling personal data and may have to make data protection filings in certain jurisdictions, she said.

Erica Schohn, a partner with Skadden, Arps, Slate, Meagher & Flom LLP in New York, said that as a practical matter, employers may find that some vendors can't or don't want to follow these rules. Employers need to leave enough time to work out these technical problems, she said.

Employment Law

In many jurisdictions worldwide, governments require employers to make mandatory pension contributions for workers on their payrolls, Quittell said.

To the extent the contributions are tied to overall compensation, equity-based awards can lift the amount of overall compensation on which the employer is required to make a pension contribution, she said.

“Also, severance can be formulaic, based on compensation levels and years of seniority, and equity-based compensation can be factored into the amount of statutory severance due,” she said.

There may be ways to get around this “depending on what type of boilerplate language you include in the award agreements or which entity is making the equity grant,” Schohn said.

Employers should also be wary of the grounds on which it is unlawful to discriminate in certain jurisdictions, Quittell said.

For example, an eligibility requirement in the equity plan that someone be a full-time employee may be considered indirect discrimination in some jurisdictions, she said.

“To the extent you have female or older employees who are apt to work part time, you will have a discrimination problem,” she said.


Employers need to understand the filing, documentation and notification requirements under securities laws that vary widely among jurisdictions, Quittell said.

A couple of questions to ask are when a prospectus is required and when disclosure is required. The answers depend on the type of equity, the people included in the program and other factors that vary depending on jurisdiction, she said.

For example, Quittell said, depending on plan design, you might need to make public disclosure at vesting, delivery or the mere holding of shares. Similarly, employers need to know what rules govern selling of shares by employees, and whether there are rules governing filings with respect to dividends or dividend equivalents, she said.

Aside from the securities rules, employers should think about what other rules are imposed by governments, Quittell said.

For example, the employer may be required to register, file and translate the equity plan documents, she said. The question then is whether these requirements are too big a hurdle if only one or two people are involved, Quittell said.


Moreover, tax considerations vary widely from country to country and also based on the kind of equity the employer is granting, Quittell said.

“The first thing to figure out from a tax perspective is when is the tax due,” she said.

“It is pretty fundamental that you want to make sure tax is not due before you have a liquidity event,” she said. “For example, if you design an equity plan and the tax is due upon grant, but vesting or delivery of shares is years away,” she said, “you will have one very ticked-off employee because they will not have equity in hand to pay their tax bill.”

Alfred Giardina, a tax partner with PricewaterhouseCoopers LLP in Stamford, Conn., said that countries are trying to tax transfers of shares. When the employer is designing these instruments, “we try to get the lawyers to delay the transfer, he said. “That is what typically works best.”

For example, restricted stock is taxed at grant in at least half of 100 countries surveyed by PwC, he said. When designing an equity plan, the employer should think about delaying the transfer of shares.

“In our research, there is no country on the planet that will tax an unfunded promise that is not vested,” he said.

“It creates problems around the world,” he said. “Countries generally tax at grant, not at vesting, so as a CPA, I'd advise clients to delay the transfer and make sure the vesting and transfer event occur near in time.”

It “will create an optimal one-tax date that can be planned around,” he said.

Electronic Acceptance of Awards

As a general legal consideration, electronic check-the-box acceptances may be “OK in the U.S.” to the extent companies are granting a common award in the same form to many different people, Quittell said. In a foreign jurisdiction, there is no settled case law in electronic acceptance.

Finally, be wary with respect to governing law. “Don't assume that Delaware law will apply worldwide,” she said.

The panel speakers also discussed internationally mobile employees, company exposure under tax equalization agreements and multicountry withholding issues.

The bottom line, Giardina said, “cost budgeting is the name of the game today. Everything is about cost management.”

The conference, “Hot Issues in Executive Compensation 2014,” was sponsored by the Practising Law Institute.

To contact the reporter on this story: Mary Hughes in Washington at mhughes@bna.com

To contact the editor responsible for this story: Sue Doyle at sdoyle@bna.com


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