Equity based compensation in the UK Legal update Janet Cooper Head of Employee Incentives Linklaters & Alliance

What a year! Who should pay social security on option gains? Will the accounting issues hold us back? Government tries to boost employee share ownership in UK Overview of developments in Europe Changes to the London Stock Exchange Impact of e-conomy

National Insurance Is there a problem?

1 National Insurance on option gains Whats the problem? since April 1999, employer pays NI at 12.2% of option gain potentially large amount (new economy companies) uncertainty large and variable provisions in accounts

National Insurance on option gains Whats the solution? pass this cost to employees transfer of liability recovery of cost settle NI liability in advance

National Insurance on option gains Transfer of NI liability effective for US GAAP form of joint election must be approved by UK Revenue can transfer all or part of liability

National Insurance on option gains Recovery of NI cost not effective for US GAAP liability remains with employer informal arrangements for employee to refund cost no approval necessary

National Insurance on option gains Tax deduction for employee 47% not 52.2% tax

National Insurance on option gains Accounting treatment in the UK future liability estimated and provided for in accounts no provision if election in place

National Insurance on option gains So whats to be done …. Ask is the company prepared to pick up cost? how will it look in accounts? do you want to transfer liability?

National Insurance on option gains To transfer liability look at plan rules prepare letter and agreement get Inland Revenue approval speak to accountants

cost of options should be recognised in company accounts 2 Accounting for share-based payments Accounting for share-based payments UK, Australia, Canada, New Zealand and US ASBs heard this before?

Accounting for share-based payments IASBs reason for change: Company is receiving value of services Accounts should reflect cost of this transaction Not happening under current rules

Accounting for share-based payments IASBs proposals: Fair value should be charged Include existing shares as well as new issue shares Includes share-based payments to non-employees Danger - might make options too expensive for some companies

Accounting for share-based payments Whats fair value? Calculated using option pricing model (eg Black Scholes) Fair value to be determined at vesting But: – options not transferable – what about unlisted companies?

Accounting for share-based payments Whats the accounting period? Charge to be spread over performance or vesting period Adjustments to be made to reflect – likelihood of vesting and – changes in option value

Accounting for share-based payments Financial impact double hit to shareholders some companies become insolvent overnight makes share awards/options very unattractive lose edge in war for talent?

Accounting for share-based payments Proposals are wrong Options are incentives not salary Cost is a dilution cost to shareholders not a profit cost Valuation methods arbitrary and unrealistic

Keep very close eye on your ASB! These proposals are coming your way Keep very close eye on your ASB! These proposals are coming your way Accounting for share based payments

3 Budget 2000 and 2001 Boost for share ownership? 2 new qualifying plans for UK employees Greater taper relief on capital gains

New qualifying all employee share ownership plan Flexible - free, partnership and matching shares (no options) To be offered to all UK employees Can be related to performance But administration burdensome Tax benefits if shares held for 5 years

EMI options Aimed to help small entrepreneurial companies recruit and retain Up to £100,000 options tax free for each of 15 key employees No approval procedure

EMI options BUT company must: have gross assets of less than £15m (~$23m) be independent be trading in the UK

EMI options Changes announced this November remove limit of 15 employees increase value limit to £2.5m

CGT taper relief Capital gains tax decreases the longer shares are held 2000 Budget - taper relief for all employee shareholders Effective CGT is 10% on gain if shares held for 4 years!

4 Overview of developments in Europe France Holland Germany Italy Spain

Holland Germany France Spain Italy

Tax on Options - Europe

5 London Stock Exchange Demutualised and listed to become London Stock Exchange plc To avoid conflict, regulatory work now under Financial Services Authority Admission to listing and trading now separate

London Stock Exchange Merger story Talks with Frankfurt Deutsche Börse exchange to form iX-international OM Group announces hostile bid LSE withdraws from iX talks LSE publishes defence to OM bid OM bid fails What next? Link with NASDAQ?

6 Impact of new e-conomy More flexible/shorter vesting No performance conditions Challenges to corporate governance guidelines

Impact of new e-conomy War for talent Global battleground Changing views of institutions?

Impact of new e-conomy dot.corps New incentive design challenges Technical challenges Institutional investor relations

So, in 2000…..

Good news - new plans, help on NI costs Keep an eye out for future options lobbying Bad news - accounting for options …….. what about 2001?

Thank you