Final ESPP Regulations - Part 2

As promised yesterday, this Blog will discuss two other issues under the final regulations governing Employee Stock Purchase Plans under Code Sec. 423 issued last week by the IRS and Treasury Department:

  • Coverage of Non-US Employees
  • Shareholder Approval

Coverage of Non-US employees

The final regulations set forth the categories of employees that may be excluded from coverage under an ESPP or an offering under the ESPP. The Regs permit multiple offerings under an ESPP with different exclusions applicable to the one or more corporations whose employees participate in the particular offering. Thus, an employer has the ability to make future and overlapping offerings that are more (or less) inclusive than prior offerings under the ESPP.

Under the Regs, whether the terms of an ESPP and offering satisfy the coverage requirements of Code Sec. 423 and the Regs is determined on an offering-by-offering basis. The terms of each offering under an ESPP may be different, provided the ESPP and offering together satisfy the requirements of Code Sec. 423 and the Regs. The terms of each offering may provide different exclusions of employees, but the exclusions established with respect to a particular offering must be applied in an identical manner to all employees of every corporation whose employees are granted options under that particular offering.

Unfortunately, the Regs do not permit employers to exclude from participation employees who are (i) nonresident aliens and who receive no earned income that constitutes income from sources within the US, or (ii) under a specified age. The preamble to the Regs provides, apologetically:

The IRS and the Treasury Department are aware of the complexities often associated with participation in an employee stock purchase plan by nonresident aliens and employees under a specified age, such as the age of majority. However, section 423 does not provide exclusions for nonresident aliens or employees under a specified age.

However, the Regs clarify that an ESPP or plan offering, in order to comply with the laws of a foreign jurisdiction, may grant an option to citizens or residents of a foreign jurisdiction (without regard to whether they are also citizens of the US or resident aliens) with terms that are less favorable than the terms of options granted under the same ESPP or offering to employees resident in the US.

Shareholder Approval

The Regs clarify that new stockholder approval is required if there is a change in (i) the shares with respect to which ESPP options are issued or (ii) the granting corporation. In particular, the Regs clarify that the stockholders of a subsidiary corporation include the parent corporation and any other stockholders of the subsidiary.

The regulations do not require the stockholders of an acquiring company to approve an amendment of the ESPP of an acquired corporate subsidiary in order to issue parent stock instead of subsidiary stock. Instead, the Regs require the acquiring company (rather than its stockholders) to approve the amendment of the ESPP to issue parent stock instead of subsidiary stock.

Effective Dates

As noted yesterday, the Regs apply as of January 1, 2010, and will apply to any ESPP option granted on or after that date. Employers may rely on the final regulations for the treatment of any statutory option granted prior to January 1, 2010.