Issues on the maturity of global share plans

18 November 2008

Is your share plan maturing soon?

A great deal of time, effort and energy is generally expended in launching global share plans, yet maturity issues can still take companies by surprise.

The main reasons for this in our experience are:
  • staff turnover – the people involved in the launch may not all still be with the company or in the same roles at maturity;
  • corporate acquisitions – sometimes companies inherit share plans; and
  • most importantly, misunderstandings about when “maturity” events occur.

Don’t let this happen to your company.  Across the world, tax authorities are paying increasing attention to compliance failures in relation to share plans and the potential penalties can be large.  This article aims to help you to plan for a smooth maturity process.

Know your plans

A sound knowledge of the share plans you operate is essential. 

Where you have been involved in the launch of the plan, this is fairly straightforward but cannot be taken for granted.  A thorough review of the plan rules and other supporting documentation, such as award agreements and exercise notices, employee explanatory booklets and any internal manuals, together with the legal and tax advice you have sought to date should help you to prevent any unpleasant surprises.

If your company has made acquisitions, check if the new employees have been participants in share plans which have rolled over into shares in your company, or whether any of them have been made any share awards outside of your general share plans policy, such as “one-off” retention awards.  Particular cases we have seen include the following:

  • A US listed company acquired several French, German, Spanish and UK subsidiaries operating various share option plans which were rolled into the US listed shares.  Years after the acquisition, some employees who had come over from the old companies could still exercise their options.  The share plan administrator in the US allowed cashless exercise of these options but the new local employers were not aware of the share plans and so did not include the income on exercise in the payroll or report it at the end of the year.  Due to the size of the company, there were many employer tax and social security compliance failures as a result and the company had to work closely with their advisors in order to disclose these failures to the tax authorities and negotiate to mitigate penalties.  In this case, some of the options were over 12 years old but still exercisable under the relevant plan rules, and, as the stock had risen over those 12 years and some of the grants were large, some of the gains on exercise were very significant.  We could envisage a situation like this arising even in the current stock market, as old options like these could still be “in the money” in many companies.
  • A Canadian listed company acquired a UK company.  Several Canadian employees moved to the UK and became ordinarily resident in the UK.  They were participants in a “restricted stock unit” plan.  The UK HR team was not aware of the plan until a notification of forthcoming payments was sent from the Canadian head office to the UK.  It transpired that the award structure was that of a nil cost option (whereas awards called “restricted stock units” may often be cash awards calculated by reference to share price) so the form and timing of the UK employer’s reporting obligations were not what the Canadian office had anticipated.  In particular, the maturity event in the UK had occurred earlier than the Canadian office expected, as the employees were taxed when they acquired the shares, not when the resulting cash payment was made the following month.

Assemble your team

As a share plan nears maturity, company staff across a range of departments will need to be kept abreast of developments. A successful share plan maturity demands a combined effort from everyone.  In a large multinational, this may include members of your Human Resources, Compensation & Benefits, Share Plans, Corporate Secretarial, Finance, Tax and Treasury and numerous payroll teams (head office and local) in addition to your advisors – lawyers and accountants, administrators and brokers.

We advise getting in touch with all of the relevant people and teams well in advance of maturity so that they can provide input where necessary and prepare for their role in the launch.  Little things like checking individual’s forthcoming holiday dates can make a big difference.

Update your advice

You need to be certain that your advice is up to date. A complex scheme might have been months in the making and years maturing; tax and social security changes happen with increasing regularity but you also need to look out for changes to the complex legal requirements for share plans, such as securities law filing requirements.

You should also check that the advice you have requested or received to date covers your current needs or whether these have changed e.g.:

  • Have you made awards in new countries?
  • Do you need advice on internationally mobile employees?

Check whether you are compliant to date

Compliance is a critical issue throughout the life of a share plan, and never more so as it nears maturity. The plan documents and legal and tax advice can be up-to-date with current law, but if the plan hasn’t been operated in accordance with these, that’s going to create problems for everyone involved. In particular, check:

  • For qualifying share plans, have all qualifying criteria been met since the plan was implemented?  If not, then your employees may have an unexpected tax liability on maturity, and your company may have unexpected payroll, reporting and social security costs and obligations.
  • Have you made the correct payroll arrangements for internationally mobile employees?
  • Have you made all the necessary securities and exchange control filings in respect of the plan to date?

Plan your HR message

Ultimately, the share plan and all the hard work that goes with it are about rewarding people, and that means there are a range of HR issues you must be on top of well before the plan vests.

In an ideal world, the maturing of a share plan is a cause for celebration; it can provide a perfect opportunity to roll out new messages about employee benefits and awards. Unfortunately, at present, due to the current turmoil in the global stock markets, many if not most stock option plans run by listed companies around the world are “underwater”, that is, the exercise price the employee pays to acquire shares is lower than the current market value.

Key employees are likely to be disappointed that their hard work over the last few years since grant is not being rewarded by a gain under the stock option plan, and employees who were offered options as a retention tool may now leave their employers.  Although the news may talk about job losses, the war for talent is still ongoing and new recruits targeted by companies may look at recent stock option performance and decide to try their luck elsewhere.

What will you do to overcome these problems?  Courses of action you may wish to consider in specific cases include cancelling and re-granting underwater options or granting cash bonuses.  In any event, we would not advise ignoring these problems as where employee morale is under threat, various issues, not least of productivity, may arise.

Restricted share awards remain of value to employees even in the current downturn where they were granted to employees for free or for nominal (par) value.  However, if share performance has been poor there is still an HR issue to be considered if employees’ expectations have not been met.

If you are making employees redundant, you need to be clear about their entitlements before and after any vesting event. If this is mismanaged the redundancies could end up costing you more and you may have disgruntled minority shareholders to deal with.

Check how you will fund the maturity

Before your share plan vests, you need to be sure that you have the shares you need to satisfy the awards and the funding arrangements in place within your international group to pay social security contributions and other costs.

For example, if your plan uses an employee trust or shares in treasury, does this currently have enough shares to satisfy awards?  If your plan uses newly issued shares, do you have the headroom to issue new shares and how will the subscription monies be paid?  You need to plan for this in advance of the share plan maturity as if shareholder approval is needed this cannot be arranged at particularly short notice.

Fulfil your compliance obligations

The advice you seek prior to the maturity of your share plan should give you enough information to make sure your company meets all of its compliance obligations.  We highlight here particular areas you should make sure you have advice on in each country:

Taxable events

You are likely to have sought advice when you launched the global plan on when awards will be subject to tax and social security in each country, however, please bear in mind that the position could have changed since you received the advice and will need to be checked and refreshed. 

“Maturity” in terms of taxable events can be earlier in some countries than in others; for example, Belgium taxes non-qualifying options where the individual has an irrevocable entitlement to the shares, whereas Spain taxes share options when the individual exercises the option.  You need to be careful to keep track of your international tax timetable for your company’s plans or risk non-compliance by missing important deadlines in particular countries through misunderstanding when your plan “matures” globally.


If you need to share employee data with a new person e.g. a new share plan administrator, check that the appropriate data consents are in place and apply to that particular transfer.  Note that EU and US data protection rules differ, and some countries have particularly strict requirements, such as Belgium. 

If your company needs to verify employee data so that you can send out particular communications or meet tax reporting obligations then be warned that this can take some time so you will need to start this administrative task well in advance of your maturity.

Securities filings

A prospectus or other filing requirement may exist on the maturity of a share plan.For example, Germany interprets the EU Prospectus Directive differently from other EU states and a public offer may be deemed to occur on the exercise of non-transferable employee share options.  You may not have been concerned about this earlier, for example, if you were under the 100 person EU prospectus exemption when you granted options, but check again in case you have more than 100 optionholders in Germany now.

Employer withholding and reporting obligations

Withholding and reporting obligations may or may not exist generally, and if they exist, they may or may not apply to share plans.  The timing may be different for income tax and social security. 

Where withholding and reporting obligations exist, this is usually for the pay period in which the employee receives income subject to income tax and/or social security.

Please note that the position varies between countries and sometimes within the same country!

Practical issues at maturity

Local payroll capability

In addition to the legal requirements, you may have practical problems.  Local payrolls may have difficulties with hold transactions and sell to cover transactions, particularly where tax is held in a central corporate account.

You may find it easiest to allow cashless exercise only in particular countries.  This will depend on e.g.:

  • the functionality of local payroll software systems; • corporate funding arrangements for that local entity; and
  • language ability of local payroll staff.

Exchange rate movements

Some companies use an internally agreed exchange rate in order to calculate intra-group cross-border payments.  Tax authorities require a more accurate exchange rate to be used for tax calculation and payroll withholding purposes.  In the current volatile currency market, the difference between a "corporate" and a "tax authority" exchange rate could have serious tax implications so it is important to check that an accurate rate is being used at the right time.

Share price fluctuations

There may be time delays between:

  • the taxable time (e.g. in some countries this might be when the employee acquires unconditional right to shares) and the plan event (e.g. in some plans this might be when the employee receives legal title to shares, or when an exercise notice is received);
  • the plan event and share settlement; and / or
  • share settlement and sale.

Currently, global stock markets are extremely volatile and therefore each delay has the potential to cause administrative complications and tax problems.

Corporate tax deductions

In some countries a corporate tax deduction may be available at exercise, but this can depend on whether you have appropriate recharge agreements in place.  The way your company funds the maturity can also affect the deduction available e.g. in Germany a deduction is not available in respect of newly issued shares but is usually available in respect of treasury shares.

You should, therefore, ensure that your tax team is informed about the forthcoming maturity so that they can prepare for it and make the necessary arrangements in good time.

Year end reporting

Following maturity, your company will still have compliance obligations in many countries.  Generally these take the form of year-end reporting to the tax authorities and / or employees, in addition to your financial accounting obligations for the year.

HR Knowledge Zone

The incentives section of Data Bank in HR Knowledge Zone covers many of the issues that arise on share plan maturities, enabling our clients to deal with maturities more cost-effectively.