Download Global Stock Options USA, NORTH CAROLINA Womble

U.S.A., North Carolina
© Copyright Lex Mundi Ltd. 2010
Global Stock Options
U.S.A., NORTH CAROLINA
Womble Carlyle Sandridge & Rice, PLLC
CONTACT INFORMATION:
Diane J. Fuchs
Womble Carlyle Sandridge & Rice, PLLC
1401 Eye Street, N.W.
Suite 700
Washington, DC 20005
202.857.4457
[email protected]
http://www.wcsr.com
To understand the answers given below it is important to first read the survey scenario,
which can be accessed by CLICKING HERE>>.
1. Are there any corporate actions that need to be taken by the Committee or the
shareholders to establish the Plan?
Yes. The New York Stock Exchange rules require shareholder approval of any equitybased plan that provides for the issuance of shares to employees, directors or other
service providers, including plans that permit the grant of nonqualified stock options
("NQSO") and incentive stock options ("ISOs"). With regard to ISOs, U.S. tax law
requires shareholder approval pursuant to Section 422 of the Internal Revenue Code of
1986, as amended (the “Code”). Shareholder approval also will be required if the Plan is
intended to comply with the $1,000,000 deduction limitation exception under Code
Section 162(m). Approval by the Board of Directors (“Board”) of Company X (or the
“Company”) is required for North Carolina ("NC") corporate law purposes (e.g., to
establish that the shares are validly issued, fully paid and non-assessable and for fiduciary
duty purposes). Under NC law, a corporation may issue options for shares and the Board
must determine the terms upon which the options will be issued, their form and content
and the consideration for the shares to be issued. Approval of the Compensation
Committee of the Board (the “Committee”) is not necessarily required, although a
recommendation by the Committee that the Board approve the Plan would be customary
and consistent with best practices and may be required by the Committee charter and/or
the Company’s corporate governance or other guidelines. NC law does not impose any
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specific shareholder approval requirements for the establishment of an equity plan
(although such approvals may, in unusual circumstances, be required under a
corporation's articles of incorporation, bylaws, shareholders’ agreement or other
instrument).
2. Are there any requirement in your jurisdiction about the composition or authority
of the Committee?
Yes. The Committee must meet various independence and other requirements imposed by
NYSE rules, Rule 16b-3 adopted under the U.S. Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and also requirements imposed under Code Section
162(m) (if the Plan is intended to be a Section 162(m)-compliant plan). (Note: As a
result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in
July 2010, NYSE listed companies and companies listed on other stock exchanges will be
subject to more strenuous compensation committee independence requirements.) In
addition, the Committee must comply with any requirements imposed under state law, the
Company's articles of incorporation or bylaws and any corporate governance
requirements, such as those imposed under the Committee charter, corporate governance
guidelines, etc. Under NC law, generally, a Board committee may be comprised of one
or more members (subject to any requirements imposed by applicable law or the
Company's articles of incorporation of bylaws), and may exercise the authority of the
Board under state corporate law to the extent specified by the Board or in the articles of
incorporation or bylaws, subject to certain restrictions on committee authority imposed
under state law.
3. What does the Committee have to publicly disclose about its Plan-related decisions
and when must those disclosures be made?
Specific disclosures regarding the Plan would be required in the proxy statement proposal
for the Plan under the disclosure requirements of the U.S. Securities and Exchange
Commission (the "SEC") prior to a shareholder vote on the Plan. In addition, the SEC
proxy rules would require detailed tabular and narrative disclosure regarding the
compensation practices and policies applicable to directors and executive officers,
including information regarding specific grants made to such persons under the Plan.
Adoption of the Plan and any material amendments to the Plan must be disclosed on SEC
Form 8-K. Additional disclosures on Form 8-K of actual plan grants to specified
executive officers is also required under certain circumstances, such as (i) grants made
upon appointment to specified executive officer positions and (ii) other grants to
specified executive officers if the terms of the grants are not materially consistent with
the previously disclosed terms of the plan. NC law does not impose any particular
disclosure standards, other than those that may be implicated in connection with the
Committee's exercise of directorial fiduciary duties of good faith, due care and loyalty.
4. Is a Participant subject to taxation: on receipt of the option; on exercise; or
otherwise?
This answer assumes that Participants are U.S. citizens or resident aliens (i.e., green card
holders) regardless of whether they reside or work within or without the United States.
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If the option has an option price at least equal to the fair market value of the underlying
stock at the time of grant, the option generally should not be subject to taxation at grant.
If the option is an ISO, the Participant ordinarily will not be taxed on the exercise of the
option (with the possible exception of alternative minimum taxation) but will be taxed (at
capital gains/losses rates) upon the disposition of the stock subject to the option,
assuming that the ISO requirements are met. If the option is a NQSO, the Participant
generally will be taxed at the time of exercise in an amount equal to the difference
between the fair market value at the time of exercise and the option price, with capital
gains/losses treatment applicable to the subsequent disposition of the stock. NC income
tax recognition generally follows the federal rules, and stock options are generally
considered to be property transferred in connection with the performance of services, and
are treated as supplemental wages. See Responses to Questions 5 through 11.
5. Does the tax treatment vary depending on where the Participant resides or
habitually exercises his duties (i.e. outside your jurisdiction)?
This answer assumes that Participants are U.S. citizens or resident aliens (i.e., green card
holders) regardless of whether they reside or work within or without the United States.
No, except that certain Participants who meet the definition of “qualified” expatriates
ordinarily may elect to (i) exclude from gross income a limited amount of foreign earned
income and a portion of their housing cost, and (ii) utilize the foreign tax credit
mechanism in computing their ultimate U.S. tax liability. For NC income tax purposes,
the Participant will generally need to be a NC resident or domiciliary at the time of
income recognition in order for NC income tax to be triggered, or the options need to be
considered to have been compensation for services performed within NC. For example,
the NC Department of Revenue has taken the position that the grant date of options can
be determinative on the issue of state residency or domicile, even though income tax may
not have yet been triggered for federal income tax purposes on the grant date. Put
differently, if a non-NC resident is granted a stock option in connection with his or her
performance of employment services within NC, the NC Department of Revenue will
likely assert that NC income taxes are owed (when the federal income taxes are later
recognized) and subsequent nonresident status is unlikely to alter NC’s position that the
options gave rise to income reportable to NC.
6. Does the tax treatment vary depending on the type of option or specific Plan
provisions concerning the option?
This answer assumes that Participants are U.S. citizens or resident aliens (i.e., green card
holders) regardless of whether they reside or work within or without the United States.
Yes, see Response to Question 4. The tax treatment will differ depending upon whether
the option is an ISO or NQSO and whether the option price is at least equal to 100% of
the fair market value of the underlying stock at the time of grant (and other Code Section
409A requirements applicable to "fair market value" options are met; see Response to
Question 11, below). Our responses assume that the survey is not seeking information
about other statutory options, such as options granted under an employee stock purchase
plan subject to Code Section 423. For federal income tax purposes, the income from the
U.S.A., North Carolina
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options treated above can either be capital gain or ordinary income, with differing tax
rates applying to the income depending upon the circumstances. NC does not have a
capital gains tax rate, and taxes all income as ordinary income, so in general the type of
stock option does not make a difference for NC income tax computation purposes.
7. Is Company X entitled to claim a deduction from (or other reduction of) taxable
income with respect to the option and, if so, when and how is this calculated?
The Company can claim a deduction when income is recognized by the Participant upon
exercise of a NQSO in an amount equal to the income recognized by the Participant
(subject to reasonable and ordinary business expense requirements). The Company
cannot claim a deduction upon exercise of an ISO unless the ISO is disqualified (for
instance, certain holding period requirements are not met). NC generally conforms to the
federal income tax treatment in this area. The Company’s ability to claim a corporate
deduction for remuneration in excess of $1,000,000 paid to certain executive officers is
subject to compliance with shareholder approval, compensation committee independence
and other requirements imposed under Code Section 162(m). (See Questions 1 and 2,
above.)
8. Does the tax treatment under 7 vary depending on where the Participant resides or
habitually exercises his duties (i.e. outside your jurisdiction)?
This answer assumes that Participants are U.S. citizens or resident aliens (i.e., green card
holders) regardless of whether they reside or work within or without the United States.
No, the treatment does not vary.
Question 5.
For state income tax purposes, see Response to
9. Are there special rules for significant shareholders (for example, more than 10%
shareholders of the Company)?
Yes, in certain cases. In order to be granted ISOs, a 10% or greater shareholder must be
granted options with an option price at least equal to 110% of the fair market value of the
underlying stock at the time of grant and with an option term of no more than five years.
NQSOs granted to a 10% or greater shareholders are not subject to this requirement. NC
would conform with the federal income tax treatment. Additionally, although economic
development (e.g., investment) tax credits against NC income taxes usually accrue only
once, such that no “new eligibility” is created through a change of control transaction,
employees’ acquisition of a certain percentage of the company’s capital stock via a stock
option program in a change of control situation can create new tax credit eligibility under
certain conditions. Generally speaking, those conditions are met if the change in control
causes optionees to acquire (a) more than 50% of the company’s capital stock, or (b) at
least 40% of the capital stock, if the business has tangible assets with a net book value in
excess of $100,000,000, and has the majority of its operations located in a NC local
jurisdiction which is ranked s a “tier one” (least developed) area.
U.S.A., North Carolina
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10. What are the other principal tax considerations, if any, such as withholding for
social insurance, employment taxes, unemployment taxes, etc., for Company X or its
local subsidiary or branch office in your jurisdiction, and the Participant?
When an ISO is exercised, there is no withholding because no benefit taxable as ordinary
income is recognized by the Participant. However, if the holding period requirements for
ISOs are not met, or if the Participant terminates employment with the employer more
than three months before the exercise of the option, the Participant will recognize as
ordinary income the lesser of the excess of the fair market value of the stock on the date
of exercise over the adjusted basis in the stock on such date or the excess of the amount
realized on the sale or exchange over the adjusted basis in the stock. Any gain realized in
excess of the fair market value of the stock on the date of exercise will be taxed as capital
gain. Regardless of whether the requirements of an ISO are met, the gain recognized is
excluded from the definition of “wages” for purposes of FICA, FUTA and federal income
tax withholding, and thus, no withholding is required. However, employees must report
on their tax returns any gain relating to the disposition of stock acquired pursuant to the
exercise.
Income arising in a NQSO transaction is considered wages, and the obligation to pay
employment taxes and to withhold occurs at the time income is generated under Code
Section 83(a). Code Section 83(a) is triggered either upon the exercise or disposition of
the option, at which point the excess of the fair market value of the shares or cash
received over the exercise price is taxed as ordinary income. Any amount recognized in
excess of the fair market value on that date will be treated as capital gain. Withholding is
required on the amounts constituting ordinary income, even if the taxable event does not
involve any cash payment to the employee that can be reduced by the amount that is
required to be withheld. Therefore, FICA, FUTA and federal income tax withholding are
applicable to gain resulting from a NQSO transaction. The employer must pay its portion
of the FICA tax, which is composed of (i) the Social Security portion of the tax (also
referred to as “OASDI”) of 6.2% of gross compensation up to the Social Security Wage
Base of $102,000 of compensation for 2008 (the SSWB is subject to cost-of-living
adjustments each year), and (ii) the Medicare tax of 1.45% of compensation, with no cap
on the amount of compensation taxed. The same amounts must be withheld from the
employee as well, resulting in a total FICA tax of 15.3%. FUTA (the Federal
Unemployment Tax Act) is solely paid by the employer, and is 0.8% of the first $7,000
per year of each employee’s wages.
NC generally conforms to federal employment tax treatment (although NC does not
consider itself to be necessarily bound by federal determinations that a particular worker
is an independent contractor rather than an employee). Similarly, where a NC employer
is subject to FUTA, it is generally also subject to the NC unemployment tax. The
definition of wages for purposes of the General Statutes of North Carolina has the same
meaning as in Code Section 3401, with exceptions not applicable here. Therefore, it is
necessary to look to the Code to determine when withholding is applicable for NC
income tax purposes. Withholding of NC tax is not required from wages paid to a
resident for services performed in another state if that state requires withholding.
U.S.A., North Carolina
© Copyright Lex Mundi Ltd. 2010
However, the relief from double withholding does not relieve the taxpayer from filing an
NC income tax return and paying any tax due after tax credit. All wages received by a
nonresident for services performed in NC are subject to withholding and any relief from
double withholding must be granted by the nonresident's state of residence.
U.S. citizens performing services in a foreign country for an employer other than the U.S.
government are exempt from withholding if at the time of payment it is reasonable to
believe the employee’s wages will be excluded from gross income under Section 911 of
the Code, or the employer is required by the laws of the foreign country to withhold
income tax on such wages. In addition, NC withholding rules are applicable to
individuals who perform services within the state, whether a resident or a non-resident,
and to individuals who are residents who perform services outside the state for wages.
Thus, once an expatriate ceases to be a NC resident, NC withholding rules will cease to
apply.
11. What needs to be done, if anything, under your local law so that Participants obtain
the favorable tax treatment offered by your jurisdiction?
In order to receive the favorable tax treatment of ISOs, certain plan terms must be
approved by the shareholders (e.g., the maximum number of shares issuable pursuant to
ISOs and eligibility); material plan amendments of this nature also require shareholder
approval. NQSOs are not subject to a similar requirement. However, NQSOs must be
granted with an option price at least equal to the fair market value of the underlying
common stock and meet other conditions in order for the award to be exempt from the
onerous and difficult requirements of Code Section 409A, which limits how and when
deferred compensation can be paid (and imposes taxes, penalties and interest upon noncompliant awards). NC generally conforms to the federal income tax treatment in this
area. In addition, as noted above (see Questions 1, 2 and 7), certain specific requirements
(including shareholder approval of certain plan terms) must be met in order for the
Company to be eligible to deduct certain types of compensation paid under the Plan
under Code Section 162(m).
12. What securities law or other regulatory (or exchange) requirements are there, if
any, such as: filing requirements; prospectus requirements; offering exemptions;
size of offering limitations; and currency requirements?
From a federal securities laws perspective, the offer and sale of securities under the Plan
must either be registered or exempt from registration. Most public companies file a
registration statement on Form S-8 with the SEC to register the securities issuable under
an employee benefit plan. Among other conditions, this requires filing the registration
statement with the SEC and payment of a filing fee. Participants must also be provided
with (i) a written prospectus which meets specific Form S-8 disclosure requirements and
(ii) certain other Company-related information; the prospectus must also be updated on a
timely basis to reflect material changes to the terms of the offering. The prospectus
required by Form S-8 would also be required to include a tax consequences discussion for
each applicable foreign jurisdiction. Typically, offering exemptions would not be
available on the federal level for this type of plan. Public companies must also comply
with NC (and other applicable) state securities laws registration and anti-fraud
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requirements, although typically an exemption from the registration requirements is
available for publicly traded securities and/or employee benefit plans. We are not
responding concerning currency requirements.
13. Is a cashless exercise permissible?
Cashless exercise is generally permissible if it is permitted by the Plan and individual
award agreement. Modifying an ISO at some point after the initial grant date to add the
cashless exercise feature may constitute a “modification” for ISO purposes under Code
Section 422 and could have adverse tax effects to the participant. Directors and officers
who are considered "insiders" for purposes of the Sarbanes-Oxley Act of 2002 may be
restricted if the cashless exercise is deemed to involve a loan or extension of credit on the
part of the Company.
14. Are there any rules in your jurisdiction that prohibit or discourage a foreign
subsidiary of Company X from granting options to acquire shares of common stock
of Company X to the subsidiary’s executives?
Possibly. Such offers generally should be made by Company X, the issuer, in order to
rely on the Form S-8 registration statement, although the foreign subsidiary could
recommend to Company X that the offers be made. The applicable foreign laws would
also need to be considered for additional restrictions.
15. Are the rules addressed in this survey applied differently based on whether the
multinational operates in a particular jurisdiction as a branch office or as a
domestic subsidiary? If so, what are these differences?
No response at this time.
16. Do executive employees in other jurisdictions need to be covered by a plan of the
subsidiary or a plan separate from your Plan to comply with your jurisdiction’s
law?
Executive employees in other jurisdictions can be covered by the Plan as long as such
executives are eligible under the terms of the Plan and the SEC Form S-8 requirements
(e.g., such persons are employees of the issuer or a subsidiary or parent of the issuer) and
as long as the applicable foreign laws do not impose requirements that are inconsistent
with the Plan or otherwise problematic to Company X. If the offers are made by a
separate plan, the federal and state securities laws would also apply to such separate plan.
17. If known, please comment on the accounting issues which are relevant for this Plan.
There are several accounting issues applicable to option plans for which certified public
accountants should be consulted.
18. List any other requirements of importance in your jurisdiction.
Equity compensation plans are governed by, or at least influenced by, a number of
securities law, tax law, corporate law, accounting and other requirements. In addition,
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institutional shareholders, proxy advisory firms and other shareholder groups exert an
increasing amount of influence on equity plan design.
19. Severance Risks: Will the value of granted options legally need to be included in
severance calculations?
The value of the granted options may need to be included in change in control/Code
Section 280 calculations, which apply in the change in control context. Other obligations
of Company X in the severance context would depend upon the applicable severance,
employment or other plan or agreement.
20. Acquired Rights: Will Plan Participants become legally entitled to future grants or
immediate vesting at termination of employment or service?
Plans customarily state that the grant of an award under a plan such as the Plan does not
impose any right on the part of a Participant to be granted future awards. It should be
noted, however, that other terms may apply as required in related individual award,
employment, merger or other ancillary agreements. Similarly, whether the Participant is
entitled to immediate vesting upon termination of employment or service will depend
upon the terms of the Plan, the individual award agreement and any ancillary agreements,
such as an employment agreement or merger agreement. In the change in control
context, institutional investors and proxy advisory firms typically favor the use of a
“double trigger” provision so that accelerated vesting of equity awards does not occur
unless both a change in control and a non-cause termination take place within a specified
time period.
21. Data Privacy: Will Company X or the local subsidiary or branch office need to take
any additional measures to adhere to local data privacy laws?
There are no federal laws that apply to the Plan; however, the NC rules would restrict the
Company from using employee social security numbers as the internal identification
number for the Plan. NC law would also require notice to employees if their private data
had been compromised to a third party.