Managing the process of granting equity awards to employees in the U.S. alone is already a huge compliance effort, but multiply that by 10+ for multinational companies that grant awards to employees around the world — navigating many securities, tax, data privacy, etc., regulatory regimes. If you administer a global equity plan, this DLA Piper alert gives a select overview of recent changes in various countries that could impact your compliance:

China: Extension of preferential tax treatment and new SAFE reporting requirements. The preferential tax treatment for equity awards granted by publicly listed companies to employees in China under Notice 35 has been extended until December 31, 2027. This extension allows equity income to be taxed separately from other compensation and taxes to be calculated pursuant to a specific formula. Companies should also be prepared to comply with the new monthly exchange control reporting requirements imposed by some local SAFE offices, which require reporting of equity transaction data, assets, and liabilities via the AS-One system online before the 15th of each month.

Germany: Changes to the one-fifth rule for equity awards. Effective January 1, 2025, tax treatment of certain equity awards are subject to change.  German employers are no longer required to apply the “one-fifth rule” for the taxation of equity award income.  Employees may still claim the benefit in their individual tax returns, although the employer should report what equity award income is eligible for the benefit in the employees’ annual wage certificate. Employers should update their withholding processes and employee communications accordingly to reflect this change and are encouraged to inform employees of how to claim the benefit on their own.

India: Offset of tax collected at source (TCS) against salary withholding. From October 1, 2024, Indian employers may be able to offset tax collected at source (TCS) paid on outbound remittances against tax withholding on salary (TDS). The government is expected to issue detailed rules and procedures to facilitate this offset, allowing employers to reduce the TDS by the amount of TCS already paid. This development is expected to enhance the financial management of equity plans and provide relief to employees.  Employees may still be able to obtain a refund for any TCS paid in connection with participation in an employee share plan in their tax return for the 2024/2025 fiscal year.

Israel: Enhanced reporting requirements for equity plans. Starting January 1, 2025, the Israeli Tax Authority (ITA) will enforce new rules for filing and reporting equity plans under Section 102 of the Income Tax Ordinance. Companies must now complete a comprehensive questionnaire as part of the filing process, which includes detailed representations about the equity plan. Additionally, the ITA will require annual and quarterly reports for both trustee and non-trustee plans, detailing grant activities, employee statuses, and tax calculations. To facilitate compliance, the ITA will introduce electronic filing systems for these reports, aiming to streamline the process and ensure accurate data submission.

Moldova: New legal provisions for stock options grants. For equity incentive plans adopted on or after January 1, 2025, the Moldovan Fiscal Code includes a new preferential tax regime for equity awards granted under a “long-term incentive program” that provide the right to receive free shares of a company’s stock or a right to acquire shares at a preferential price. The new regime should allow employees to defer taxation to the date the shares underlying the awards are sold provided three conditions are met: (1) the employee share plan is approved at a general meeting of shareholders, (2) the shares subject to the awards must not exceed 25 percent of the parent’s social capital, and (3) the awards must be subject to a minimum three-year vesting schedule. If the conditions are met, then the gain at sale should benefit from capital gains tax treatment whereby employees will only be subject to tax on 50 percent of the gain at sale.

Vietnam: New exchange control requirements under Circular No. 23. Effective August 12, 2024, Circular No. 23 has removed the requirement to register a foreign company’s employee share plan with the State Bank of Vietnam (SBV) previously required under Circular 10.  Instead, companies must now submit necessary documentation with a commercial bank for review before the bank will provide the foreign exchange services needed to operate a company’s plan. This change also introduces a monthly reporting requirement with the SBV, replacing the previous quarterly reporting obligation, and prohibits the outflow of currency related to offshore awards (eg, offering an ESPP will generally still not be permitted). All transactions related to a company’s plan must still be processed through a dedicated account with a local commercial bank.

– Meredith Ervine 

According to this Pay Governance memo, over 700 companies in the Russell 3000 submitted equity plan proposals in 2024. Here are key trends to know if you’ll be submitting a proposal this year:

• Nearly 25% of Russell 3000 companies submitted an equity plan proposal in 2024. Shareholder support was strong, about 90% on average, and less than 1% of proposals failed to receive majority support (very similar to 2023 levels).

• It is most common for companies to return to shareholders every 2 to 3 years to seek equity plan approvals.

• Proxy advisor opposition to equity plan proposals typically results in lower shareholder support; however, the equity plan proposal failure rate increases very modestly (to a failure rate of less than 4%).

• Russell 3000 companies that received low shareholder support had median potential dilution of 20%, or double the median of the overall Russell 3000 potential dilution of 10%.

• Among the small sample of companies that failed to receive shareholder support over the last two years, approximately half were in the healthcare sector, and the majority of companies that failed had higher potential dilution levels compared to the median of their respective sector.

• There are several steps companies can take to navigate toward a successful shareholder vote outcome for an equity plan proposal, including analyzing the share reserve needs and relative potential dilution, understanding top shareholder voting policies and proxy advisor concerns, and clearly disclosing the shareholder-friendly features of the equity plan.

– Liz Dunshee

Last month, Chancellor McCormick approved the settlement in Tesla’s big director compensation case. Although the amounts in this case were dwarfed by Tornetta, the directors are returning and forgoing about $920 million in total value – that’s a big deal! This Reuters article summarizes:

The settlement requires Tesla board members including Denholm and Murdoch to return roughly $277 million in cash, $459 million in stock options and to forgo stock options for 2021-23 worth $184 million. The settlement was not covered by insurance, according to a court filing by the shareholder who brought the case.

The damages will be reduced by $176 million, which is what the judge awarded to the plaintiffs’ lawyers. According to Reuters, that’s the 4th-largest fee award in the history of Delaware derivative suits.

I’ve previously blogged about the governance aspects of the settlement, which had been proposed way back in 2023. In addition to requiring the Compensation Committee to annually review director compensation with advice from an independent consultant, it requires Tesla to submit director compensation to a shareholder vote for the next 5 years. The settlement agreement says (in part):

On an annual basis, Tesla shall submit the proposed annual compensation to be paid to Non-Employee Directors to an approval vote of the majority of Unaffiliated Tesla Stockholders present in person or represented by proxy and entitled to vote on such decision.

Mike Levin at The Activist Investor shared in his newsletter that he objected to the settlement language about the vote. He’s concerned there’s no enforcement mechanism if the shareholders vote against director pay – i.e., the vote will be treated as a mere advisory recommendation, similar to say-on-pay. Here’s an excerpt describing his objection:

As for the enforceability of the shareholder vote, the settlement provides for a shareholder vote on director comp for the next five years. It states a voting standard (majority of shares voting at the AGM) and excludes directors from voting on their own comp. Yet, it is completely silent as to the consequence of a majority of shareholders voting against the proposed director comp for a given year. We urged her to require specific consequences of such a vote, namely TSLA doesn’t pay them.

Chancellor McCormick “doesn’t see it [our] way.” She states a brief, cryptic rationale: “…the company is committing to condition director compensation on approval by the minority stockholders. That agreement and that term is as enforceable as any corporate agreement.”

Your guess is as good as mine on how this will play out. One thing I’m sure of is that this won’t be the last time we’ll be blogging about Tesla’s director pay. We’ll be watching the vote!

– Liz Dunshee

Vanguard has adopted its 2025 voting policies for U.S. portfolio companies – thanks to Aon’s Karla Bos for alerting us to this release! Dave blogged yesterday on TheCorporateCounsel.net about the main updates, and this Reuters article also gives background.

There are no significant changes to Vanguard’s “executive pay” policies this year, although the updated policies do tighten the language in a few places, e.g.:

– Referring to “long-term returns” (rather than “long-term value”)

– In the context of assessing alignment between incentive targets & strategy, the language clarifies that the company sets its strategy

– Noting that, where pay-related proposals consistently receive low support, the funds look for boards to demonstrate “consideration of” shareholder concerns (rather than “responsiveness to” – although the “responsiveness” language still appears elsewhere, so don’t consider this a free pass to ignore feedback)

– For determining whether there is concern with a peer group, the policy clarifies that Vanguard is looking at whether the company’s disclosed peer group is not aligned with the company in size or sector

As Dave noted, the 2025 policies also take a more general approach to proposals, versus signaling how it will approach particular topics. Included on the cutting room floor is commentary about shareholder proposals that request disclosure of workforce demographics, such as EEO-1 reports. In addition, Vanguard eliminated a paragraph about its voting criteria for annual or long-term bonus plans and other proposals relating to executive pay – which had been similar to the say-on-pay & plan analysis disclosed elsewhere.

– Liz Dunshee

People are optimistic that we’ll see more IPOs this year. If your company is considering going public, this ClearBridge Compensation Group memo outlines equity compensation issues that should be part of the planning. Here are the key takeaways:

Establishing a Stock Plan

▪ Median initial share pool is 10% of basic common shares outstanding (“CSO”)

▪ Majority of companies include an evergreen provision upon going public (~4% to 5% of basic CSO annually), recognizing they are almost always removed when shareholder approval is next requested

One-Time Special Grants in Connection with Going Public

▪ For CEOs, grants typically range from ~0.5% to 2.5% of market cap at grant, with an inverse relationship between market cap and grant value as a percent of market cap (i.e., grant values as a percent of market cap are generally higher at companies with lower market caps and vice versa)

▪ Over 2/3 of these grants include a performance-based vehicle such as stock options or performance share units (“PSUs”), often in combination with time-vested restricted stock units (“RSUs”)

▪ Most common performance metric is stock price/total shareholder return (“TSR”)

Go-Forward LTI Compensation

▪ >90% of public companies grant LTI on an annual basis, typically limited to more senior levels in the organization (e.g., directors and above)

▪ Common to initially solely grant time-vested vehicles (e.g., RSUs) annually, with companies generally beginning to introduce performance-vested LTI (e.g., PSUs) annually within 3 years

For even more info about compensation-related considerations before going public, check out the full memo – as well as Meredith’s blog last fall about “cheap stock” and other issues. Also visit our “IPOs” Practice Area for more resources.

– Liz Dunshee