White & Case ECB News – Issue 2, 2015: Understanding Your "Boilerplate"

by White & Case LLP
Contact

Whilst most people associate boilerplates with mundane provisions in the back of award agreements and stock incentive plans, their importance to employers in providing security and flexibility when setting up plans should not be underestimated.

White & Case partners Nicholas Greenacre (London) and Henrik Patel (New York) presented an overview of key boilerplate provisions at this year's annual NASPP conference in San Diego and shed light on how boilerplates are best tailored to protect employers.

Which boilerplate provision should employers pay most attention to when drafting plan rules?

Henrik Patel: General interpretation is probably the most important boilerplate in most stock plans and the ability to delegate powers of interpretation to what is usually a designated committee of the board of directors. This is especially important in a change of control scenario given that certain corporate transactions may or may not trigger clauses defining change of control in the general glossary of the plan. It is key to provide the employer with authority to allow interpretation of provisions including the definitions in the plans themselves.

The employer will need to consider factors like duration and geographical extent of limitations under both applicable laws in order to decide whether a restrictive covenant is enforceable.

Nicholas Greenacre
White & Case, London

What kinds of difficulties should employers be prepared to face with practical applications of certain boilerplates?

Henrik Patel: Whilst it is recommended to include a governing law clause specifying the system of law that will apply to determine the rights and obligations of the parties, the existence of an express choice of governing law does not necessarily mean that terms of the plan will ultimately be enforceable. In the US, an example would be where employers choose the more amenable Delaware or New York law over California law where it is difficult to enforce non-competes. This does not mean that they will necessarily be able to enforce an equity plan non-compete if a California employee brings a claim in the California courts.

Nicholas Greenacre: Similarly, whatever governing law you choose, there will still be local laws in the context of employment which have mandatory application. For example, it is not possible to contract out of the rights that employees have not to be unlawfully discriminated against or out of data privacy law. It is worth noting that certain local laws, such as Danish law, are stricter than others. (Danish law effectively re-writes your bad leaver provisions). This impacts the extent of an employer's flexibility in setting terms in a plan document.

Are there any boilerplates which may assist employers in pre-empting a court, that has jurisdiction in relation to the plan rules, from ruling against the employer's interests?

Henrik Patel: The key provision here would be a severability clause which, where a provision is held to be invalid, illegal or unenforceable, allows the plan to be construed and enforced as if the provision was never included – the so-called "blue pencil". In the US, this comes up mostly in the non-compete context.

Nicholas Greenacre: In the UK, a leading case – Duarte v Black and Decker – established the principle that the courts, at least in the UK with likely international application, will not enforce a restrictive covenant which is contrary to the local rules on restraint of trade even where there is an express choice of a different governing law in the plan document. This effectively means that a covenant has to be enforceable both under the governing law of the contract and local law. In Duarte this was Maryland law and English law, respectively. The employer will need to consider factors like duration and geographical extent of limitations under both applicable laws in order to decide whether a restrictive covenant is enforceable. Proper severability provisions might make it easier to enforce the covenant because they allow you to ignore less amenable aspects.

Can boilerplates assist employers from falling into potential pitfalls with regulators or other authorities?

Nicholas Greenacre: In some countries, such as Russia, there are good reasons to allow transfers to off-shore jurisdictions and to family trusts or participants who want the ability to transfer for tax planning reasons. However, this right should be carefully limited. In the EU, for example, granting transferable securities, and in particular options, have securities law implications. Regulators in Europe have collectively agreed that non-transferrable employee options do not trigger prospectus filing requirements, whilst an offer of transferable securities to the public does, subject to various exemptions. The tax withholding boilerplate, on the other hand, allows employers to avoid pitfalls with local authorities, as in certain countries there may be a time limit and other restrictions on when and what you can recover. Otherwise, employers may only be able to rely on some kind of contractual indemnity from the participant authorising recovery, despite having missed a potential deadline for recovery under local law.

Henrik Patel: Generally, plan rules provide that participants cannot transfer or assign equity awards, except in the case of the participant's death. The purpose behind this boilerplate goes to the tax characterisation of the awards and whether or not, and when, they are taxable. If you had an option that could be freely transferred and the person could receive value for it, I think the IRS would look at that as a freely transferrable option and may tax it sooner. Similarly, a tax withholding provision authorising the company to collect and pay taxes on behalf of the participants is helpful where there has been a failure by the company to withhold and you need to recover from the employee. This boilerplate needs to be carefully drafted to ensure it's effective.

Which final boilerplate should no equity plan be drafted without?

Henrik Patel: We would generally recommend including an entire agreement clause which prevents a court from considering extrinsic evidence in its interpretation of contractual rights owed to the parties. It is important to keep the participant's employment agreement separate from the equity plan, the rationale being that if an employee sues under an employment agreement, he should not be able to use potentially more favourable rights than those under the equity plan. I should add here that most companies would prefer to avoid California law as governing law, if at all possible, as California courts generally do not accept an entire agreement clause and tend to admit extrinsic evidence with ease.

Are there certain boilerplates which should be included in plans operating in one country that should not be include in those operating in another country?

Nicholas Greenacre: Some advisors will say that you have to have a different form of award agreement for different countries. So, for example, in Canada there are specific rules about taking into account notice periods on severance and you ought to have some specific provision for that in a separate schedule for Canadian participants. However, this is actually a provision that it would not do any harm to have in all of your award agreements.

It is not necessary to have a whole series of agreements, sub-plans or schedules for different jurisdictions because it only leads to complications – each year you have to update and review each of those agreements. Further, you will often find that much of each additional schedule will relate to things such as reporting requirements or other items that do not need to form part of the agreement between the individual and the employee. This goes to the heart of the issue – when considering what needs to go into the schedules the question to ask is what actually needs to be included in the contract between the individual and the employee? Having, for example a single US agreement and a single international agreement is advisable and generally easily achievable.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© White & Case LLP | Attorney Advertising

Written by:

White & Case LLP
Contact
more
less

White & Case LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.