Employee Share Plans in Europe and the USA - Sorainen

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Employee Share Plans in Europe and the USAUnited States of America5.4 Favourable tax regimes5.4.1 Incentive stock options: ISOs may only be awarded to employees of acorporation (as well as employees of certain subsidiary and parententities). An option will qualify for favourable tax treatment, if certainrequirements are satisfied. 16 These requirements include that, generally,the exercise price of the ISO must not be less than the fair market valueof the underlying stock at the grant date. In addition, the fair marketvalue of the underlying stock (determined at the date of grant) that arefirst exercisable by the employee in any one calendar year cannotexceed $100,000.As noted below, grants that qualify as ISOs should generally not raiseissues under Code Sections 409A and 457A.5.4.2 Employee stock purchase plan: The purpose of an employee stockpurchase plan is to provide eligible employees with the opportunity toacquire company stock through periodic after-tax payroll deductions.Such payroll deductions are applied during designated offering periodsand are used to purchase shares of the company’s common stock at theconclusion of the applicable offer period (often at a discount to thecurrent fair market value). Under an employee stock purchase plan thatmeets the qualifications set out in Code Section 423, no taxable incomeis recognised by the employee either upon receipt of the purchase right,at the time of entry into the offering period or upon actual purchase ofshares on the purchase date.16The requirements that must be satisfied are as follows: An option must be a stock option grantedunder a written or electronic plan that (i) specifies the aggregate number of shares of company stock(as an ascertainable number (e.g. not as a percentage of shares outstanding from time to time)) thatcan be issued under the plan (or specifies the total number of shares that may be subject to ISOs), (ii)specifies the employees or class of employees eligible to receive ISOs and (iii) is approved by theshareholders of the adopting corporation within 12 months before or after the adoption. ISOs cannotbe granted more than 10 years after the adoption of the plan (or shareholder approval, if earlier), andany plan amendments affecting the number of shares issuable or the eligibility requirements must beapproved by the shareholders. In addition, an ISO, by its terms, cannot be exercisable more than 10years after the date of grant (or five years after grant in the case of a grantee who owns at least 10% ofthe voting stock of the employer corporation or any parent or subsidiary). The exercise price of the ISOmust be no less than the fair market value of the underlying stock at the time of grant (or 110% in thecase of an option granted to a 10% owner), and the option generally must expressly be nontransferable.The fair market value of the underlying stock (determined at the date of grant) that arefirst exercisable by the employee in any one year cannot exceed $100,000. If the plan does notprovide for such $100,000 limitation, any excess options will not receive ISO treatment.UK/1729295/03 209 September 2010
Employee Share Plans in Europe and the USAUnited States of AmericaTo qualify as an employee stock purchase plan under Code Section 423,certain requirements must be met. 17 These requirements include thatthe exercise price must be at least 85% of the market price of the shareson the date the option is granted or, if so designed, may be the lower ofsuch price and 85% of the market price on the date the shares arepurchased. In addition, the maximum fair market value of stock that anemployee may accrue the right to purchase under the plan and allsimilar plans in any calendar year cannot exceed $25,000.As noted below, plans that qualify under Code Section 423 shouldgenerally not raise issues under Code Sections 409A and 457A.5.5 Application of Code Section 409ACode Section 409A generally provides that amounts deferred under a nonqualifieddeferred compensation plan are currently includible in a serviceprovider’s gross income to the extent such compensation is not subject to asubstantial risk of forfeiture and was not previously included in the serviceprovider’s gross income, unless certain requirements are met. Further, noncomplyingdeferrals are subject to an additional 20% tax and additional intereston any underpayment of taxes. As noted above:5.5.1 Restricted stock: Restricted stock is generally not subject to CodeSection 409A.5.5.2 Stock options: Stock options are generally not subject to Code Section409A if (i) granted at fair market value (ii) with respect to “servicerecipient stock” and (iii) do not have any additional deferral features.17An employee stock purchase plan under Code Section 423 must meet the following requirements: (i)options are granted only to eligible employees of the employer corporation or its parent or subsidiarycorporation; (ii) the plan must be approved by the shareholders of the corporation within 12 monthsbefore or after the date the plan is adopted; (iii) 5% owners must be excluded from participation in theplan; (iv) all employees of the designated participating companies must be eligible to participate, withsome exceptions; (v) all eligible employees must be given the same rights and privileges under theplan; (vi) the exercise price must be at least 85% of the market price on the date the option is grantedor, if so designed, may be the lower of such price or 85% of the market price on the date the sharesare purchased; (vii) the term of the option may generally not exceed 5 years (if the purchase price isnot less than 85% of the market price on the grant date) or 27 months (if the purchase price isdetermined in any other manner); and (viii) the maximum fair market value of stock that an employeemay accrue the right to purchase under the plan and all similar plans in any calendar year cannotexceed $25,000; and (ix) purchase rights must be non-transferable, other than by will or the laws ofdescent and distribution and exercisable only by the participant during the participant's lifetime.UK/1729295/03 210 September 2010
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Employee Share Plans in Europe and the USA - Sorainen

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