Structuring “Stock Option” and “Profit Sharing” Programs is a challenge, but a growing demand from Brazilian representation offices, subsidiaries, and joint ventures of foreign organisations.
As they involve corporate, contracts, labor, and tax, we list below 5 points of attention in structuring these programs to reduce the risk of bad experiences:
1. Creation of a Plan: Talent retention programs are organized through a Plan, be it a Stock Option, Profit Sharing, or another. It contains the general terms and conditions of the program.
2. Contract with Each Eligible Executive: For each executive/employee that becomes eligible to participate in the Plan, a specific bilateral contract should be signed between the organisation and the beneficiary in order to deal individually with the package to be awarded for that person.
3. Cliff Period and Acquisition Period (Vesting): Talent retention plans usually establish a “cliff” period (eg 12 months), in which, if the employee leaves at this time, he/she is automatically excluded from the plan. From the end of the cliff term onwards, the vesting period begins, where the beneficiary gradually has the right to acquire the options of shareholding or profits, pro rata on a monthly, quarterly or annual basis.
4. Labor and Tax Aspects: Key points in Talent Retention Programs are the labor and tax aspects. In addition to observing the limits of the legislation, there are recent administrative and judicial decisions in both areas that guide the correct structuring to mitigate risks that can become elevated. Programs must constitute an onerous business, of a mercantile nature, and cannot constitute a labor or social security obligation between the organization and the selected participants.
5. Other Important Issues: There are a number of legal points to be considered in these programs, and, added to those listed above, care must be taken (i) that the beneficiary must be bound by any existing shareholder agreement, (ii) that the options are non-transferable, (iii) what situations the organisation will have the right to cancel the program and repurchase the beneficiary’s shares, (iv) what happens in case the beneficiary leaves the organization, etc.
Stock option programs are very common in jurisdictions such as the US and Europe. For Brazil, attention must be doubled as it is a fairly recent movement, so several legal aspects that must be observed in order to reach the goal, which is to effectively retain talents and, at the same time, not create corporate, labor and tax liabilities over time.