What kinds of share acquisition/share purchase plan can be offered?
Companies that are publicly-traded in the US usually offer most US employees the opportunity to purchase shares at a discount with after-tax payroll deductions through an employee stock purchase plan that complies with Section 423 of the US tax code (“ESPP”). Such plans usually have offering periods of 6 or 12 months during which time funds are accumulated for the purchase of company stock, usually at the lower of 85% of fair market value at the beginning or end of the offering period. Generally, purchases must be capped at USD25,000 per calendar year.
Private companies rarely offer ESPPs. They may, however, allow executives to purchase restricted stock.
Share acquisition or share purchase plans can be offered to either selected employees, to full-time employees, or employees with certain attributes (i.e. seniority, salary range, per site, etc.), provided it is not a public offering, which would require satisfying requirements under Mexico’s Securities Law. Normally, the plan will require participants to decide on a percentage of their salary to be contributed through payroll deductions, to purchase shares at a preferential price. Participants will be able to exercise their right of cashing out the purchased shares after a vesting period and normally at certain date following termination of employment with the Mexican employer.
Similarly with incentives plans generally, Romanian legislation is rather silent in what concerns the type of incentive plans that can be implemented locally, the only difference arising in terms of applicable tax treatment. In this view, the rules are the same regardless of the type of the titles covered by such incentive schemes, as follows: shares of a joint stock company, participation titles in a limited liability company, shares of a listed entity, shares within a closed entity.
It is however equally noteworthy that we rarely see the actual Romanian employer being in charge with managing the plan and/ or offering its shares as part of the plan. It is more often that the underlying Romanian employment relationship is used to originate and facilitate participation in the plan, which will typically follow rules of a group entity based in another jurisdiction.
See question 2.
In Ecuador, shares can be transferred without restriction. The Ecuadorian labor law does not establish a special procedure for this purpose. Share assignments are regulated by a special law that does not make any distinction in terms of a worker’s performance on the job or his or her employment relationship with the company in which the shares will be assigned.
Restricted Shares, Performance Share Plan.
No limitations apply in this respect, so also Restricted Shares, Restricted Share Units (‘RSUs’) and Performance Share Units can be offered.
The most common types of share acquisition/share purchase plans are the following:
- Matching shares: the participant is required to purchase shares of the company and keep such shares under lock-up during the vesting period, after which the company delivers a certain quantity of shares to the participant for each share initially acquired by him/her. The company must transfer treasury shares to the participant in order to satisfy the delivery of the matching shares.
- Stock Grant/Performance Shares: the participant is granted the right to receive shares upon completion of the relevant vesting period, in exchange for a symbolic price (or in a cashless manner). Under a performance share grant plan, the participant is granted the right to receive shares upon completion of the relevant vesting period and achievement of certain performance goals established in the plan, usually in a cashless manner. The company must transfer treasury shares to the participant in order to satisfy the delivery of the awarded shares.
The traditional type of employee share purchase plan is the scheme of an employee shareholding partnership provided by the Japanese Civil Act. Under such a plan a small amount of contribution is deducted from the employees’ salaries on a regular basis for the purchase of stock of the company via the partnership. The employees are entitled to receive dividends in proportion to their contribution to the capital stock.
As mentioned above, some companies have implemented a scheme so called a “Japanese ESOP” under which employees can obtain shares utilizing certain financial instruments such as a trust. Regardless of the name “ESOP”, this scheme is different from an ESOP as is utilized in the USA for which a specific law is enacted. A Japanese ESOP is considered as a general term of financial instruments which are particularly developed for companies willing to grant the company’s shares to employees.
Typical share purchase plans are different varieties of purchase of shares with a discount. Such plans may involve a saving arrangement where a portion of the monthly salary is withheld and periodically used to purchase discounted shares.
Another funding method may be a loan to employees, given in relation to discounted share purchase, with monthly repayment. An interest free loan could be tax free if the amount is limited and repayment within 12 months. The current (until May 2019) maximum interest free loan that can be given tax free is NOK 58,129.
Share acquisition/share purchase plans may be combined with share matching with further conditions or sales restrictions.
Like share option plans, share acquisition plans can be either (i) all-employee or discretionary; and (ii) tax-favoured or non tax-favoured.
Share Incentive Plan ("SIP")
A SIP is a tax-favoured share ownership plan. Although (unlike a share option plan) participants own their shares from the outset, they have to be held within a specially formed SIP trust. SIP, like Sharesave, is an all-employee scheme. As a result, participation under a SIP must be offered to all eligible employees on the same terms.
Share Offers are a discretionary and non tax-favoured form of share acquisition plan. Under a Share Offer a company will usually offer shares to a wide range (but not necessarily all) employees. The shares will typically be purchased by participants at market value and held under nominee arrangements for a set amount of time.
Joint Share Ownership Plans ("JSOP")
A JSOP allows participants to acquire an interest in a share as opposed to the entire share. This interest entitles the participant to benefit from some of the growth in value of the share above a pre-determined threshold. The return realised by the participant should be taxed as capital gain rather than income.
There are no specific kinds of acquisition/purchase plans under German law. Nevertheless, purchase plans exist in a one-time or a deferred purchase manner.
- A stock corporation must meet the requirements of the German Stock Corporation Act to grant shares to their employees in the same way as for share options (mentioned above under question 2). The share purchase plan itself may be subject to the grant of shares or convertible bonds.
- Limited liability companies (Gesellschaften mit beschränkter Haftung) may transfer shares to the employees to make them shareholders or may grant a subscription right to the employees to own shares in the company. This is very uncommon, since the grant of shares in a limited liability company requires notarial recording in each case.
- The company may link the share purchase plan to different vesting periods as mentioned above. The possibilities mentioned are applicable to share and share option plans.
- The company can offer a possibility to the employee to invest an amount or percentage of the employee´s monthly income in shares of the company. The company usually retains the agreed amount from the monthly amount of remuneration paid and the shares will be passed to the respective employee. Thus, the parties usually agree on a cap on the investment.
In addition to the free share plans, several kind or share acquisition/share purchase plan exist, notably capital increases reserved to employees.
Note that under French law, in stock companies having employees, any decision by the extraordinary general meeting of shareholders to increase capital by cash contribution (unless it results from a prior issue of securities giving access to the share capital) must be accompanied by a vote on a draft resolution to carry out an increase of capital reserved for employees, whether or not the company already has set up a company savings plan (if the general meeting votes in favour of the resolution, the company will then have to set up a savings plan, if it does not already have one). In addition, every 3 years, a general meeting must be convened to vote on a draft resolution to carry out a capital increase if the shares held by the employees of the company (and its affiliates within the meaning of the French Commercial Code) represent less than 3% of the capital. The purpose of this regulation is to promote the development of employee share ownership by imposing periodic meetings and thus forcing shareholders to discuss this topic on a regular basis.
The following types of share-based plans can be offered, although no specific laws or regulations apply:
- Employee stock ownership plan: Under this type of plan, employees receive free shares or pay a price for the shares that is lower than market value.
- Restricted share plan: Two kinds of restricted share plans could be distinguished:
- Plans where the acquisition of shares is subject to certain specific conditions such as the company/employee´s performance, the share price reaching a certain value, etc.
- Plans where acquired shares cannot be sold until a certain period has elapsed.
- Deferred stock unit plan: Under this type of plans companies undertake to provide employees with a certain amount of free shares each year during a certain period.
Employers are entitled to create any type of share acquisition/purchase plan they want to establish with their employees.
As mentioned in the previous number, as there are no specific laws or regulations related with this subject, when offering share plans to their directors or employees companies are only limited by the type of company, its by-laws and, if applicable, the shareholders agreements that may exist.
The attribution of remuneration based on financial instruments, and in particular on shares, may take place through different methods of recognition of a variable remuneration, the fluctuation of which, linked to the value of the share, may depend on the assignment:
(i) in kind of the same share;
(ii) a differential amount linked to the change in the market price of the same share.
These different modalities, which can also be used simultaneously, differ according to the type of instruments or rights assigned. In practice, such remuneration may be granted in the form of stock grants, i.e. share grants or share value increases, or option grants, i.e. the granting of option rights that allow the subsequent purchase of shares with settlement by physical delivery or by cash.
In the area of stock grants the following may be included:
- newly issued shares or shares already in circulation (and therefore purchased by the company on the market), whose delivery time may be:
- “restricted stock”, that is, immediate. In this case, the attribution generally allows the immediate availability of the related capital benefits; for such shares there is a sales restriction often linked to the duration of the employment relationship;
- “restricted stock unit”, that is, deferred. This is a promise to allot shares at a future date (corresponding to the time set out in the vesting conditions); this mechanism generally does not allow to benefit from dividends paid during vesting.
- Rights to receive payments in the future based on the value of a hypothetical or notional quantity of shares; in other words, these are compensation plans based on financial instruments that do not provide for the physical delivery of the instrument but of a differential amount (so-called phantom stock).
The area of option grants includes the assignment of:
- options that confer the right to purchase or subscribe, at a future date, shares that are newly issued or already circulating (so-called stock options); in some cases the exercise price is established as fixed, initially at the time of assignment, in others it is parameterized on the basis of specific formulas that take into account the performance of the same share or of the market as a whole (so-called index stock option);
- options that give the right to obtain the differential variation, of the value of a certain number of shares, in a certain period of time (so-called stock appreciation right or SAR); these mechanisms, although similar to phantom stocks, differ from them, since, generally, they do not reflect the effects of ordinary dividends and often provide for the delivery of a quantity of shares with a value equivalent to the accrued differential.
Adding to the explanations above, since there are also no genuine share purchase plans regulated under Turkish Law Provisions, mostly higher ranked employees in managerial positions are granted with equity based plans as employee stock purchase plans as imitations of the plans established abroad or other equity based incentives as phantom stock and stock appreciation rights.