What kinds of share option plan can be offered?
Stock options may be issued as incentive stock options (“ISOs”) or nonqualified stock options (“NQSOs”).
ISOs are subject to strict statutory limitations and conditions on features such as award size (no more than USD100,000 of grant value may become first exercisable in any one calendar year), time limits on exercising (generally ISOs must be exercised within 3 months of termination of employment), and a requirement that the plan be approved by shareholders.
NQSO are more commonly issued and are not subject to such limitations and conditions unless granted by US publicly-traded corporations in which case the plan must be approved by shareholders as an exchange listing requirement with the exception of certain inducement grants that may be made to new employees.
There is no limitation in Mexican law with respect to the possibility of offering an equity-based plan, where the employer or a related company would allow eligible employees (and sometimes contractors, agents or employees of selected providers) to participate in the same. Accordingly, share option plans may include (i) shares with or without corporate rights to selected employees; (ii) options to purchase shares at a discounted price; (iii) units or restricted units related to the performance of the company’s shares; (iv) phantom shares without issuing a title or certificate, among others. In every case, in order to achieve the intention of becoming mid or long-term incentive plans, a vesting period will require the participant to hold on the grant, until the shares, certificates or units can be exercised.
Romanian legislation is rather silent on the type of share option plans that can be offered to local employees - as this depends on the will of the employer and the rationale for implementing the incentive plans. As the share option plan is generally implemented in the context of an underlying classic employment relationship (or a similar relation between an entity and an individual - such as a director mandate), it is seen as a benefit in kind (part of the remuneration package).
Notwithstanding the above, Romanian tax legislation contains specific provisions under which a share option plan that fulfils certain conditions may qualify as a tax exempt benefit granted to employees.
The conditions mainly refer to: (a) the period of time for which the share option plan is implemented; (b) the entity designing and implementing such a plan; (c) the relationship between this entity and the individuals potentially benefiting of the plan; (d) existence of specific terms and conditions for the plan.
In principle, the aim of such tax legislation is to support the efforts of the business environment to motivate and retain their employees within a highly competitive market. However, in order to claim this more favourable tax treatment, one should ensure that all conditions are met and properly documented - this requires a detailed case-by-case analysis of such motivational schemes.
Share option plans entail that the employer is obligated to sell stocks or issue warrants (“Shares”) to the employee on a later specific day and that the employee receives a right – and not an obligation – to purchase the Shares in the employee’s company (the “Company”) on a later specific day.
Share purchase plans entail that the employer is obligated to sell stocks or issue warrants to the employee on the day of the granting and that the employee is entitled – and not obligated – to purchase Shares in the Company on the same day as receiving the grant.
If the employee chooses not to use the granted right to purchase Shares in the Company, the right lapses without any economic consequences for the employee.
Under Danish legislation, options- and purchase plans (“Incentive Plans”) are mainly regulated by the individual employment agreement. This entail that Incentive Plans can be designed in many ways.
However, when two parties agreed on an Incentive Plan, the Incentive Plan can be subject to the Danish Stock Option Act (in Danish: aktieoptionsloven), the Danish Salaried Employees Act (in Danish: funktionærloven) or an individual employment agreement.
The Danish Stock Option Act entails that an Incentive Plan under which an employee is entitled to purchase Shares in the Company on a specific day is subject to the regulation in the act. The consequences of the Danish Stock Option Act are outlined further in question 10.
The Danish Salaried Employees Act section 17a covers bonus payments under an Incentive Plan paid out to a salaried employee. In question 10, the consequences of section 17a in the act are outlined.
If an employee is not a salaried employee and the Danish Stock Options Act does not apply on the Incentive Plan, the grant is regulated by the employment agreement and the Incentive Plan entered into between the parties.
Below, different kinds of Incentive Plans are outlined.
Incentive plans subject to the Danish Stock Option Act:
Share Incentive Plan
Share Incentive Plans entail that the employee is granted a right to purchase Shares in the Company on a later specific day. The purchasing price will, normally, be set to market price, but can be set to another price based on the employer’s decision or the parties’ agreement.
Restricted Shares (the first type) entail that the employee is granted a right to receive Shares free of charge on a later specific day. If the employee is terminated prior to the specified day, the right to receive Shares lapses.
Performance Shares entail that the employee is granted a cash amount, which is withheld by the employer. On a later specific day, the employee is entitled to purchase Shares in the Company for the withheld amount. The specific day is, usually, two to three years after the granting day.
The price of the Shares is, normally, set at market price. Thus, the amount of Shares, which the employee can purchase for the withheld amount, depend on the market price of the Shares on the specific day.
Stock purchase plans
Stock purchase plans entail that an amount of the employee’s salary is deducted and withheld by the employer on a monthly basis. At the same time, the employee is granted a right to purchase Shares in the Company with the deducted amount on a later specific day.
If the employment is terminated prior to the specific day or the employee chooses not to purchase Shares in the Company, the right lapses and the accumulated deduction will be paid out to the employee.
Incentive plans subject to the salaried employees act or an individual agreement:
Phantom Shares entail that the employee is granted a cash amount equal to the difference between the market price of the Shares on the granting day and the price on a later specified day. The specified day is, usually, two to three years after the granting day.
Restricted Shares (the second type) entail that an employee is granted the right to purchase Shares in the Company on the granting day.
Normally, the plan entails that the employee will be obligated to sell back/return the Shares to the Company, if the employee resigns prior to a specific day. The specified day is, normally, one to two years after the granting day.
Matching Shares entail that an employee is offered to purchase Shares in the Company at market price. If the employee choses to purchase Shares, the Company will match the amount or value of the Shares by granting the employee with the same amount of Shares in the Company on a later specified day. The specified day is, normally, two to three years after the granting day.
Share option plans can be offered with regard to shares in the local company where the employee works and/or shares in the parent or a subsidiary company. Generally, there is no restriction for employees to access shares in a company.
Restricted Shares, Share Options, Stock Appreciation Right, Phantom Stock, Performance Share Plan, Performance Unit Plan etc.
Nearly all share options offered to employees fall within the scope of employee share options of the Dutch Wage Tax Act and are taxable upon exercise or disposal.
Deviations are very rare and would, e.g., apply if the employee is awarded options on shares in a company that is holding less than 1/3rd of the shares in the employing company – in such non-qualifying situation the share option would be taxable upon vesting. Because of its rare nature this alternative is not further discussed below.
From a Dutch tax perspective share option plans are inefficient: the exercise gain is taxable at progressive rates in the hands of the employee and without a matching deduction for corporation tax. For latter reason Share Appreciation Rights (‘SARs’) are to be preferred over share options, as SARs are generally tax deductible for corporation tax, subject to one exception: no matching deduction would be available if the employee’s taxable remuneration in the calendar year preceding the year of exercise exceeded EUR 572,000 (2019 amount).
The only share option plan expressly provided for under the Brazilian Corporation Law is the stock option plan, by which the participant is granted options to acquire shares in exchange for a strike price.
The stock option plan must be approved by the shareholders in a general shareholders meeting and the bylaws of the company must have an authorized capital stock, within which the new shares may be issued in order to satisfy the exercised options.
Upon exercise of the options, the company may issue new shares in favour of the participants, without having to comply with shareholders’ statutory pre-emptive rights. The company may also transfer treasury shares to the participants in order to satisfy the exercised options.
There are various types of share options available in Japan; however, in practice, the two most common share options alternatives are the following:
(i) granting of an option to the employees and/or directors to exercise the right to purchase shares at a price equal to or slightly below the market price on or immediately before the grant date. In substance, this type of option is supposed to be an incentive plan to improve the company’s performance. It is common to set a forfeiture condition, forfeiting the right granted by the option when the employee no longer has an employment relationship with the company, for instance, in case of termination of the employment; and
(ii) granting of an option to the employees and/or directors to exercise the right to purchase shares at a lower price than the market price. In substance, this type of option is supposed to be used to pay a wage-related compensation such as a retirement allowance. It is common to set an exercise condition, for instance, the retirement of the holder of the right.
According to the company legislation, shares must be subscribed to at least the nominal value. Share options to employees that will be fulfilled with existing shares do not require a minimum exercise price.
There are no special other restrictions related to type of share option plans that can be offered.
Share option plans can either be (i) all-employee or discretionary; and (ii) tax-favoured or non tax-favoured.
All-employee plans must be offered to all qualifying employees, whereas a discretionary plan can be offered to selected individuals or groups of employees.
Tax-favoured plans operate within a special tax regime, under which (provided strict criteria are adhered to) participants will not pay any income tax on exercise of their option and will pay capital gains tax on the sale of their shares. Under non tax-favoured plans, income tax and (usually) social security contributions (called national insurance) will be payable on the exercise of the option.
The most common types of share option plans are as follows:
Company Share Option Plan ("CSOP")
A CSOP is the traditional method of giving employees a personal interest in the future success of a company. Under such plans, employees can be awarded options to acquire shares in the issuer company at a future date (usually no sooner than three years from the date of grant) at their current market value. A CSOP is a discretionary share option plan therefore participation does not have to be extended to everyone; it can be offered simply to selected individuals (usually chosen to participate by the board of directors or remuneration committee). It is usual for a CSOP to be designed in two parts. The first part is structured as a tax-favoured plan under which it is possible to grant options that benefit from favourable tax treatment. There is a limit on the value of shares that an individual can hold under such tax-favoured options at any time. Options above this limit are granted under the second part of the plan which is drafted on broadly the same terms as the first but without the restrictions attaching to tax-favoured plans.
SAYE Option Scheme ("Sharesave Plan")
A Sharesave Plan is a tax-favoured plan with similar objectives and benefits to a CSOP. Unlike a CSOP, a Sharesave Plan must be open to all qualifying employees and therefore favours wider share ownership. Sharesave options are exercisable after three or five years and their exercise is financed by the proceeds of special tax-efficient savings accumulated through the deductions from the participant's salary which are required to be made over the life of the option.
Enterprise Management Incentives ("EMI")
Under an EMI plan an issuer company can grant tax-favoured share options to selected employees. The rules governing the terms of EMI options are very flexible which means they can be tailored to deliver the desired incentive and reward. The exercise price of an EMI option can be at, above or below the market value of the shares at the time the option is granted. Unlike other forms of tax-favoured share incentive, an EMI option does not have to be held for a set period of time to receive favourable tax treatment on exercise.
Performance Share Plan ("PSP")
A PSP is the term often used by companies to refer to arrangements that give executive directors and senior employees an opportunity to acquire free shares at a future date dependent on the satisfaction of performance criteria. Other names given to these arrangements include 'Long-Term Incentive Plans', 'Deferred Share Plans' and 'Restricted Share Plans'.
It is usual to structure such arrangements as a non tax-favoured option plan but with the exercise price set at a nominal amount or even nil. PSPs usually permit awards to be granted in a variety of other ways such as awards that vest automatically without the award holder having to formally exercise them. The plan may also allow awards to be satisfied in cash. This gives the issuer company the flexibility sometimes needed when using the plan in different jurisdictions where a particular type of award structure may be preferred for tax or other reasons.
German law does not prescribe any special form of share option plan. In practice, the following types of share option plans, which are to be divided into equity and non-equity plans, can mainly be found. In the absence of legal requirements and based on the principle of contractual freedom, the flexibility of non-equity plans is extremely high, whereas equity-based plans must meet regulatory requirements:
Equity-based share option plan:
- A stock corporation may offer share options or convertible options to their employees. The company must meet the requirements of the German Stock Corporation Act. The company provides the employees with a corresponding number of share options, which the company has purchased or created through an increase of capital. Generally, stock corporations grant such share options at a lower purchase price than the fair market value to their employees.
- The company may introduce different vesting periods with the share option plan in order to achieve different objectives (known as restricted share option plan) within a specific and extended period of time. This form of share option plan provides the employee with an ongoing incentive to high performance. Generally, three types of vesting conditions as incentive elements may commonly be found: the plan may provide that the employee remains a certain period of time with the company before being granted a first batch of share options or the granting is linked to annual performance criteria. Another plan type may provide the possibility to accelerate the vesting period by achieving predetermined goals.
- Instead of issuing options on its shares, the company can also implement a share option program for which the company acquires issued or to be issued options on its shares (in the market) from third parties (usually credit institutions or investment banks) and forwards them to the beneficiaries.
Non-equity share option plan:
- In case of a phantom share/virtual share option plan, the employee is contractually entitled to a payment if early agreed exercise conditions are met. Usually in such a standard plan, the employee is then entitled to a cash payment in the amount of the difference between the agreed base price and the share price at the time of exercise (instead of transfer of shares). The payment can be linked to the expiration of a certain period of time, such as the distribution of profits at the end of the financial year, or to the occurrence of an exit event (e.g. sale of the company or parts of it or in case of a “good leaver” termination). Virtual share option plans have no direct influence upon the capital structure of the company or the composition of the group of shareholders. They do not directly dilute the share price.
Several kinds of option plans exist, bearing in mind that a share option plan may become an acquisition/purchase plan. The most common are stock-options, which allow employees (usually managers) of a company to subscribe or purchase, for a fixed period, shares of their company (or, under specific conditions provided for by the French Commercial code, shares of other companies belonging to the same group), at a price fixed in advance, which cannot be modified during the term of the option.
The beneficiaries, conditions for granting and exercising options must be defined in the plan.
The scheme, when it meets the conditions laid down by the French Commercial Code, is subject to a preferential social and tax regime.
Other kind of option plans exist, such as shares purchase warrants (“BSA” – Bons de souscription d’actions), or warrant to subscribe for shares of a business creator (“BSPCE” – Bons de souscription de parts de créateurs d’entreprise), which also entitle the beneficiary to subscribe, during a specified period, for shares whose price is fixed at the time of grant.
Spanish employment regulations do not contain any specific provisions on the kinds of share option plans might be offered by companies to their employees. Consequently, companies have flexibility regarding the selection of the kind of share option plans to all employees regardless of whether they are executives provided that anti-discrimination rules are considered when awarding options.
Although there are no specific labour law provisions concerning share-linked awards, the most common share plans plans are the following ones:
Share option plans
Under an option plan, employees are granted options to buy the company's shares at a fixed price. The exercise of the option must take place within a set period.
Options in some share option schemes may only be exercisable if certain conditions are met. The conditions generally relate to performance objectives.
Phantom share options
In phantom share option plans, options over shares are not granted. Instead, a cash award is made equivalent to the gain the employee would have made if the employee had exercised options over real shares.
Share option plans are not very common among Colombian employers, however some companies do offer such plans to their employees. Some employers give shares to their employees as gifts, and they do not necessarily have to purchase them or perform any additional payment to become shareholders. In other cases, employers grant stock options in which employees can decide whether or not to acquire them in a specific period of time.
There are no general rules restraining the kind of plans that can be offered. It depends on the type of company, its by-laws and shareholders agreements.
Share saving plans and other incentive schemes that require the implementation of trust arrangements rise specific questions, since Portuguese law does not recognise the concept of “trust”, which involves a separation between legal and beneficial ownership. Nevertheless, in some few cases, Portuguese companies belonging to international groups have stock option schemes through trust arrangements outside of Portugal.
Employees of medium/large-sized multinational companies can also be remunerated through certain stock incentive plans aimed at encouraging and retaining employees. This phenomenon is very widespread in Anglo-Saxon countries, but has now also involved the Italian economy. In particular, Stock Option plans are most widely used in this area.
In our legal system, stock options are governed by Article 2349 of the Italian Civil Code, entitled "shares and financial instruments in favor of employees", and by Article 2441 of the Italian Civil Code, which provides for the right of option.
As mentioned above, Stock Option plans are a tool for rewarding and retaining the loyalty of the beneficiary workforce (employees or directors) considered strategically important for the company.
Through the assignment of Stock Options, the company offers an employee the right (option) to acquire his/her own shareholding, or that of another company belonging to the same group, in a predetermined future period and at a fixed price, usually equal to the value of the shares at the time of the offer itself.
The following key moments can be distinguished in a stock option plan:
- granting of the so-called option right, i.e. the moment when the beneficiary becomes entitled to be a shareholder of the employer company or of another company belonging to the same Group. At this time, the so-called strike price is also fixed;
- vesting period, from the offer of the option to the initial term for its enforceability, which, in turn, can be diluted over time;
- exercising, i.e. the date on which the option right is actually exercised and therefore the share is actually acquired under the conditions laid down at the granting stage.
This is the basic structure of a stock option plan, which must be specifically governed by the Regulations that the Companies are required to finalize and approve in order to define the specific conditions, by way of example:
- capital increase to service the plan;
- whether or not options may be transferred;
- subordinating the exercise of the option to the achievement of certain performances;
- the forecast of a maximum life period of the plan at the end of which vested and unexercised options expire;
- limitation to the exercise of options in the event of termination of employment.
Stock option plans therefore aim to link part of the salary to the performance of the stock on the market, thereby encouraging employees to increase their productivity in order to improve the efficiency and profitability of the group.
The tax relief for stock options governed by Article 51, paragraph 2, letter g-bis) of the TUIR was repealed by Decree Law No. 112 of 2008. This regime consisted in the exclusion from taxation of the employee of income in kind deriving from the assignment of shares in the company with which the employee had an employment relationship or in another company of the Group. Following the abrogation, the difference between the value of the shares at the time of the assignment of the option right and the amount paid by the employee always contributes to forming the taxable income from employment.
However, no changes were made to the tax rules governing the shares assigned to most employees pursuant to Article 51, paragraph 2, letter g) of the Consolidated Income Tax Act. Therefore, the value of shares offered to employees are still excluded from the calculation of one’s dependent employment income provided that the shares:
- are offered to all employees;
- have a total value not exceeding Euro 2,065.83 for each tax period; if this threshold is exceeded, the excess alone is subject to taxation;
- are not repurchased by the issuing company or the employer or otherwise disposed of before at least three years have elapsed since the assignment.
In line with the lack of specific legislation Q2 and Q3 are answered in following paragraphs below.
Genuine employee stock option plans or share purchase plans are not specifically addressed under Turkish law except few provisions but they are not prohibited, either. A company may establish one of the plans applied abroad complying with tax, capital markets, employment and commercial law rules.
Foreign companies operating in Turkey or Turkish companies may design employee stock option and stock purchase plans and award stock option to their employees in Turkey in their employment contracts or supplementary employment documents describing benefits granted to employees.
As per Art. 15 of Decree No. 32 on the Protection of the Value of Turkish Currency, a foreign company can offer foreign securities and capital market instruments to the employees of a subsidiary in Turkey.
In addition to the Currency Law and the Foreign Capital Markets Law, employee financial participation is covered by different laws; the recognised forms are profit-sharing, stock options and, to a limited extent, employees share ownership. Legislation permits employee share ownership in joint-stock companies during privatisation and in private companies.