Central and South American Legal Issues for Employee Stock Plans Presented by: Valerie H. Diamond & Alyce Werdel Baker & McKenzie Global Equity Organization April 17, 2002

Summary This session will address legal issues that arise when granting options and purchase rights to employees in Central and South America. We will discuss those countries where securities and exchange control compliance is required. We will examine whether payroll deductions (for stock plan purposes) are permitted and design alternatives where these deductions are problematic. Finally, we will discuss the labor entitlement issues that commonly arise in this area of the world. Throughout the session, we will discuss actions a company can take to minimize its risk of legal liability. Biographies Valerie H. Diamond–Baker & McKenzie Ms. Diamond focuses her practice on employee benefits, international stock plans, executive compensation, ERISA and pension plans. Ms. Diamond has worked most recently in helping companies that are implementing international stock plans to deal with the tax, securities law and exchange control issues that arise when options or purchase rights are granted to employees working abroad. Recent projects include all employee option grants to employers in 35 countries and implementation of employee stock purchase plans in 65 countries. Ms. Diamond has also assisted clients in meeting international compliance obligations relating to the repricing of options and option exchange programs, the creation of data privacy waivers, the grant of stock options to expatriates and the issuance of restricted stock. Ms. Diamond is chairman of the 2001 Fall Conference committee for the Western Pension & Benefits Conference. She is a member of the National Association of Stock Plan Professionals and the Global Equity Organization. Ms. Diamond is a frequent speaker on international equity issues. Recent publications on equity topics include an article for The Daily Journal, entitled, “Coping with Foreign Securities Laws in Offering Employee Stock Options Outside The United States.” Ms. Diamond received her J.D. in 1993 from the University of San Francisco School of Law where she received the Dean’s Award for highest grade point average in her class and was a Comment’s Editor for USF Law Review. She has an M.A. and B.A. in history from California State University, Sacramento. Ms. Diamond is admitted to practice in California. Alyce Werdel –Baker & McKenzie Ms. Werdel focuses her practice on international equity compensation and employee benefits. Recent projects include advising a Fortune 500 company on the tax, securities, exchange control, data privacy, and labor issues of an all-employee stock option grant in over 90 countries and completing regulatory compliance for the grant; and implementing a global stock purchase plan in over 40 countries. Ms. Werdel has also assisted clients in complying with regulatory requirements in over 70 countries as a result of a spin-off transaction, has drafted data privacy consent forms and has advised clients on various expatriate and employee transfer issues. Ms. Werdel is a member of the National Association of Stock Plan Professionals, the Global Equity Organization and the International Foundation of Employee Benefit Plans. She was a founding board member of Global Equity Organization. Ms. Werdel has given presentations to the San Francisco chapters of the National Association of Stock Plan Professionals and the Western Pension and Benefits Conference. She has published articles in the Global Equity Organization library. Ms. Werdel received her J.D. in 1990 from the University of Notre Dame, where she received the American Jurisprudence Award in Jurisprudence and the 1990 Class Award for Excellence in Essay Writing. She was on the Dean’s List for 3 of the 6 semesters. She received her B.A. in 1986 from Stanford University.

Topics for Discussion Overview of Regional Issues Country Specifics Trends and Best Practices

Overview of Regional Issues Tax Chargebacks Result in Employee Tax and Withholding Chargebacks Difficult Due to Exchange Controls/Withholding on Payment Special Taxes in Addition to Income Taxes Securities Law Private Placement vs. Employee Plan Exemptions Special Procedures and Number of Offerees

Overview of Regional Issues Exchange Control Restrictions on Flow of Funds Into and Out of the Country (Rather Than Holding Foreign Securities) Cashless Exercise and Keeping Below Thresholds Payroll Deductions Adequate Consents Minimum Salary Deductions for Authorized Purpose

Overview of Regional Issues Labor Law Vested Rights Severance Indemnities Translation Requirements Electronic Signatures Beneficiary Designation

Argentina Stock Options Tax Employee: Tax on Spread at Exercise; Social Contributions on Spread No Tax on Sale, unless Conducting Other Business Enterprises Annual Personal Asset Tax on Shares – (.5% - APR 102,300 – APR 302,300 and.75% over) Stamp Tax on Shares – 1% - 3% Bank Tax on Transfer of Funds –.6% Reimbursement of Spread Subject to Withholding Employer: Withholding on Spread for Tax and Social Contributions

Argentina Stock Options Securities Law Private Placement (Individually Address/Spanish) Exchange Control In Flux Cashless Exercise? Labor Law Regular Grants Become Part of Employment Agreement – Disclaimer Language Recommended Parent is Not Employer and Options Are Not Part of Salary Offer by Parent on Behalf of Subsidiary

Argentina Stock Options Electronic Signatures Not Necessarily Valid Translation Strongly Recommended Designation of Beneficiary Likely Unenforceable

Argentina ESPP Payroll Deductions Prohibited Payroll Deductions Prohibited if Parent Company Plan (Branch is Okay) Deductions Cannot Exceed 3% of Employee’s Gross Monthly Salary Argue it is a “Voluntary Savings Program” Low Risk Conservative Approach = Checks Exchange Control In Flux

Brazil Stock Options Tax Employee: No Tax at Exercise; No Social Contributions Due Tax at Sale – Capital Gains Rate Statement of Compliance with Law Reimbursement Not Possible Due to Exchange Controls Employer: No Withholding Exchange Control Cannot Easily Acquire US Dollars to Purchase Shares – Cashless Exercise

Brazil Stock Options Labor Law Vested Rights Severance Indemnities – New Labor Case  Separate from Employment Agreement, Minimize Employment Relationships and Disclaimer Language Recommended  No Risk Because Cashless Exercise

Brazil Stock Options Electronic Signatures Not Necessarily Valid Translation Advisable

Brazil ESPP Payroll Deductions Minimal Risk Exchange Control Significant Costs and Administrative Burden –Central Bank Circular 3,013 –Must be Subsidiary –Limited to US$20,000 per 12-month per Employee –Submission of Documents at Grant, at Purchase, 90 days of Purchase, and Annually (Resolution in Portuguese and Letters from Employees)

Dominican Republic Stock Options Tax Employee: No Tax at Exercise; No Social Contributions Due Likely Tax at Sale Possible Stamp Tax Reimbursement of Spread Subject to Withholding Employer: Tax Reporting but No Withholding Exchange Control Cannot Easily Acquire US Dollars to Purchase Shares – Cashless Exercise

Dominican Republic Stock Options Labor Law Regular Grants Become Part of Employment Agreement – Disclaimer Language Recommended Employee Waiver of Rights Unenforceable Due to Public Policy; Subsidiary can Indemnify and Hold Harmless the Parent Company to Minimize Parent’s Exposure as a “Joint” Employer

Dominican Republic Stock Options Electronic Signatures are Okay Translation Only if Employees Unable to Read English

Dominican Republic ESPP Exchange Control Intercompany Book Entry of Funds May Avoid Approval Requirement Request Approval for Foreign Currency to Purchase Stock of Foreign Company Through Central Bank

Mexico Stock Options Tax Employee: Tax on Spread at Exercise and Social Contributions Required if Reimbursement is Made Tax on Sale Employer: Withholding and Reporting on Spread if Reimbursement is Made Securities Law Not a Public Offer

Mexico Stock Options Labor Law Policy Statement on Discretionary Plan to Minimize Vested Rights Severance Indemnities  If Reimbursement, Inclusion More Likely  Discretionary Language Recommended (Not Part of Salary), Options Not Part of Employment Agreement and Consistent Payroll/Benefit Records Kept

Mexico Stock Options Translation Not Required Electronic Signatures are Valid if Reliable, Secure and Documented Beneficiary Designation Likely Not Valid

Mexico ESPP Payroll Deductions For Authorized Purposes Only – Savings Plan (“caja de ahorro”) Minimum Salary – Deductions Exceed 30% of Amounts by Which Salary Exceeds Minimum Wage Double Enrollment Form  To Parent to Enroll  To Subsidiary to Authorize Deductions Checks?

Puerto Rico Stock Options Tax Employee: Tax on Spread at Exercise; Social Contributions on Spread Tax on Sale Qualified Plan – Approval Required Employer: Withholding on Spread for Tax and Social Contributions Securities Law Exemption if Stock Listed on Exchange

Puerto Rico Stock Options Labor Law Risk of Joint Employer Status for Parent Severance Termination Issues – Disclaimer Language Recommended Translation Advisable Electronic Signatures are Valid

Puerto Rico ESPP Payroll Deductions Used to be Illegal As of August 2000, Deductions Permitted Provided Statutory Consent Language Used

Chile Stock Options Tax Employee’s Tax Treatment  Exercise: The spread is characterized as work-related income and subject to tax at exercise, if reimbursement is made. Otherwise, no tax.  Sale: The tax treatment at sale is affected by whether the investment is registered with the Chilean Internal Revenue Service (“CIRS”). oInvestments registered with the CIRS (cash exercises in excess of US$10,000): Taxable amount at sale is the difference between the sale price and the acquisition cost (as adjusted for inflation). oInvestments not registered with the CIRS (cash exercises of US$10,000 or less and cashless exercises): Risk that the taxable amount is the entire sale proceeds.

Chile Stock Options Employer’s Tax Treatment  Income Tax Withholding and Reporting: Required on spread at exercise if reimbursement is made.  Social Insurance Contributions: Required on spread at exercise if reimbursement is made. Exchange Control Cash remittances in excess of US$10,000 must be made via the Formal Exchange Market and registered with the Central Bank. Cashless exercises where the combined option price exceeds US$10,000 require the filing of a notification with the Central Bank. Transactions amounting to US$10,000 or less do not require compliance.

Chile Stock Options Securities Law A foreign company is not required to register with the Registry of Securities. Recommend securities disclaimer language in employee communication materials. Labor Law Options may be vested rights and included in compensation for labor purposes. Recommend employees sign labor disclaimer language acknowledging the discretionary nature of the plan and the nature of the payment.

Chile Stock Options Electronic Signatures Electronic signatures are probably valid in Chile if they meet the requirements under law of country designated in the choice of law provision in the relevant document. Translation Not required, but recommended.

Chile ESPP Exchange Control Calculation of the US$10,000 limit is done on a per employee basis. Payroll Deductions Payroll deductions must be authorized in writing (hard copy) and cannot exceed 15% of monthly compensation.

Colombia Stock Options Tax Employee Tax Treatment  Exercise: 70% of the spread at exercise is subject to income tax.  Sale: Colombian resident nationals and foreign individual resident in Colombia for at least four years will be subject to tax at the time of sale on the subsequent gain. Employer Tax Treatment  Income Tax Withholding and Reporting: Required on the spread at exercise if reimbursement is made.  Social Insurance Contributions: Required on the spread at exercise if reimbursement is made, unless the employee and employer specifically agree that the options will not constitute salary for social insurance purposes.

Colombia Stock Options Exchange Control Cash Exercises: The investment abroad must be registered with the Bank of the Republic if it is made through the official foreign exchange market. Cashless Exercise and Hold: Employee must register the investment abroad with Bank of the Republic if his/her aggregate investments abroad equal or exceed US$500,000. Cashless Exercise and Sell: No compliance required.

Colombia Stock Options Securities Law Grants to more than 99 persons are public offers subject to approval by the Superintendency of Securities. In addition, the securities must be registered and listed. Cashless exercise does not avoid securities issues. New law pending.

Colombia Stock Options Labor Law Options may be vested rights and included in compensation for labor purposes. Recommend employees sign labor disclaimer language acknowledging the discretionary nature of the plan and the nature of the payment. Disclaimer language gives rise to further risk that parent company may be an “employer party” for labor purposes. Take steps to reduce this risk.

Colombia Stock Options Electronic Signatures Generally, electronic signatures are valid if certain precautionary steps are taken. Translation Requirement Translation is not required unless documents are challenged in a Colombian court. However, it may be advisable to translate the documents in certain circumstances. Beneficiary Designation Plan provisions permitting the employee to designate a beneficiary are valid.

Colombia ESPP Electronic Signatures and Payroll Deductions Electronic enrollment is permissible, but the payroll deduction authorization should be executed in hard copy.

Costa Rica Stock Options Tax Employee Tax Treatment  Exercise: Spread at exercise is not subject to tax unless reimbursement is made.  Sale: No tax on the gain. Employer Tax Treatment -Income Tax Withholding and Reporting: Required if reimbursement is made. -Social Insurance Contributions: Required if reimbursement is made.

Costa Rica Stock Options Securities Law Generally, no securities issues; if employee population is large, may wish to confirm that the grant is not a public offer. Labor Law Risk that options will be vested rights and included in compensation for labor purposes. Recommend employees sign labor disclaimer language acknowledging the discretionary nature of the plan and the nature of the payment.

Costa Rica Stock Options Electronic Signatures Electronic signatures are under consideration by the Costa Rica Congress; hard copy signatures should be obtained until electronic signatures authorized under local law. Translation Requirement Generally, translation is not required, although it may be advisable in certain circumstances. Beneficiary Designation Plan provisions permitting the employee to designate a beneficiary are valid.

Costa Rica ESPP Payroll Deductions Advisable to amend enrollment form to refer to voluntary contributions rather than payroll deductions.

Peru Stock Options Tax Employee Tax Treatment  Exercise: No tax on spread at exercise unless reimbursement is made.  Sale: No tax at sale unless employee is a “habitual buyer and seller” of securities. Employer Tax Treatment  Income Tax Withholding and Reporting: Not required unless reimbursement is made.  Social Insurance Contributions: Not required unless reimbursement is made.

Peru Stock Options Securities Law Option grant should not amount to public offering subject to securities regulation, but it is advisable to make certain information available to the employees. Labor Law Risk that options will be vested rights and included in compensation for labor purposes. Recommend employees sign labor disclaimer language acknowledging the discretionary nature of the plan and the nature of the payment.

Peru Stock Options Electronic Signatures Electronic signatures are enforceable in Peru. Translation Requirement Generally not required, but may be advisable in certain circumstances. Beneficiary Designations Beneficiary designations must comply with local law to be valid.

Venezuela Stock Options Tax Employee Tax Treatment  Vesting/Exercise: Uncertain what the taxable event is for the employee – may be vesting or exercise.  Sale: Tax at sale; risk that spread at exercise could be taxed twice. Employer Tax Treatment  Income tax withholding and reporting and social insurance contributions are not required.

Venezuela Stock Options Securities Law Recommend requesting a ruling from the National Securities Commission that the grant is not a public offering if grant is made to more than 50 employees. Labor Law Risk that options will be vested rights and included in compensation for labor purposes. Recommend employees sign labor disclaimer language acknowledging the discretionary nature of the plan and the nature of the payment.

Venezuela Stock Options Electronic Signatures Electronic signatures are generally valid. Translation Requirement Generally not required, but may be advisable in some circumstances.

Trends and Best Practices Labor Law Vested rights and related labor issues arise in nearly all countries in this region; risks are greater with an ESPP. Standard disclaimer language should be included in option agreement, enrollment form or stand-alone document; should be signed by the employee. Exchange Control Typically, exchange control regulations require regulatory approval for the transfer of funds or ownership of the shares, or they require certain transactions be reported to the Central Bank. Problems may be minimized by mandating cashless exercise or using a book entry transfer.

Trends and Best Practices Payroll Deductions Often payroll deductions are not permissible under local law. May have to permit contributions outside of the plan (i.e., via check from the employee or automatic wire transfer from the employee’s bank account). Electronic Signatures Some countries in this region do not recognize electronic signatures or do not have laws in place specifically addressing their enforceability. Recommend careful review of the status of the law prior to implementation.