SESSION 7.1

International Best Practices: A Collection of Practical Solutions to

Real Global Stock Plan Problems

Barbara Richley, E*TRADE Corporate Services (US)

Brian Ruff, Eli Lilly and Company (US)

Jewon Wee, ISP Advisors, LLC (US)

B

Session 7.1 International Best Practices:

A Collection of Practical Solutions to Real Global Stock Plan Problems

Today’s Panelists

Jewon Wee (US) ISP Advisors, LLC

  Share plan consulting firm founded in February 2009

  ISP Advisors offers affordable and practical guidance for global employers in the following areas:

  Global equity & incentive plan optimization

  Compliance risk management

  Plan operational excellence

  We also offer strategic business and product consulting services for stock plan solution providers

Brian Ruff (US) Eli Lilly and Company

(NYSE:LLY)

  Founded in 1876, and are now the 10th largest pharmaceutical company in the world

  Approximately 40,000 employees worldwide (roughly 50% outside the US)

  Performance Units and Restricted Stock Units granted globally to over 6,000 participants in 60 countries (roughly 40% non-US participants)

Today’s Panelists (continued)

Barbara Richley (US) E*TRADE Corporate Services

  For more than 25 years, E*TRADE Corporate Services has helped companies manage and administer their equity compensation plans

  E*TRADE remains at the forefront of the industry by providing end- to-end support for all equity vehicles

  With one-quarter of the S&P 5001 – E*TRADE sets the standard for innovation in an environment of regulatory change and workforce globalization

1 Data as of 12/31/2009. Compiled by E*TRADE Financial Corporate Services, Inc.

Today’s Panelists (continued)

Nine Global Stock Plan Problems & Solutions, plus Other Pitfalls

General Problems 1.  Data management 2.  Payroll tax withholding

process 3.  Annual reporting

management 4.  Mobile executives 5.  Currency issues 6.  Dealing with Regulatory/Tax

Position Changes

Country-Specific Problems 7.  China – SAFE filing/compliance 8.  Denmark – Acquired rights 9.  Russia – Emerging securities regulations

Other potential pitfalls   Unique FMVs for tax purposes   Israel: Withholding upon sale   UK: NIC approval caution   US: Preparing for IFRS2

Problem #1: Global Participant Data Management

What: Consolidate, house, and maintain participant data needed for stock plan transactions for a global workforce (e.g., payroll country, tax withholding rates, etc.)

Why you should care: The more global a company is, the more challenging and important it is to ensure that the information tracked on participants is complete and accurate, especially as it relates to terminations and movement between countries for taxation purposes

Problem #1: Global Participant Data Management (continued)

Analysis/Alternatives: Stock Administration must work with Human Resources and/or Payroll to receive complete and accurate participant information in a timely fashion Common approaches are:   Centralized – if all employee information is stored in a single database, it will not be necessary to consolidate the information and procedures can be established to automate import files   De-centralized – if each country maintains their own employee information, it will be necessary to coordinate the consolidation of information and import files may require human manipulation

Problem #1: Global Participant Data Management (continued)

Solutions/Best Practices:   Participant personal and tax information should be updated in your recordkeeping software after each payroll cycle   If possible, only get delta information to make it easier for you to identify changes that may require special handling

Problem #2: Payroll tax withholding

What: Determine appropriate tax rates to apply when deducting withholding taxes from taxable equity award gains recognized by non-US participants, and ensure correct amount is reported to the appropriate tax authorities and the withheld taxed remitted in a timely manner

Why you should care: Most countries conduct routine payroll audits and some have begun to focus on equity compensation related non-compliance opportunities; penalties can be severe

Problem #2: Payroll tax withholding (continued)

Analysis/Alternatives: Available alternatives depend on the equity programs utilized and withholding methods permitted under the plan rules Common approaches are:   Centralized – Collect and apply “effective” or “marginal” tax rates to calculate and deduct withholding taxes   De-centralized – Deduct nothing and have local entities calculate and collect withholding taxes due

Problem #2: Payroll tax withholding (continued)

Solutions/Best Practices: Use a centralize payroll compliance approach with localized accountability   Clearly understand of your software/vendor capabilities on tax withholding services and design a compatible process   Create a tax withholding/rates table for all countries in which you have participants (collaborate with local country payroll)   Create a country-specific “payroll procedures” to be shared with local countries (Who does What, When, How and WHY!)

Problem #3: Annual reporting & filings

What: Recurring annual reporting and filings responsibilities can become easily forgotten, especially if you rely on a local resource and he or she transitions out of the role

Why you should care: Failure to comply with local reporting and filing requirements may result in costly fines, restrictions on your ability to offer future awards in the respective country, and negative publicity inconsistent with your company’s desired branding strategy

Problem #3: Annual reporting & filings (continued)

Analysis/Alternatives: Evaluate affiliate resources, data sources, deadlines, and the complexity and stability of ongoing requirements; centrally manage or oversee local compliance Examples include:   French Qualified Plan – 10% social tax   Hungarian Financial Supervisory Authority – notification of offering   Philippines year-end reporting of option and share purchase activity   Pakistan foreign exchange application – App. V-95, detailed cover letter   Australian Addendum

Problem #3: Annual reporting & filings (continued)

Solutions/Best Practices:   Provide clear expectations and local resource accountability for simple, stable requirements   Use centralized management of complex filings that require information from corporate, partnering with local teams as needed   If in doubt, manage centrally, relying on global equity service partners

Problem #4: Mobile executives

What: Executives who travel with outstanding equity awards while on international assignments can pose additional complexities and risks for the company

Why you should care: Due to the “cross-border” nature of this problem, it is complicated; a small number of mobile executives can trigger considerable exposure to both monetary and non-financial risks

Tax authorities around the world have become more aware of the non-compliance in this area and have begun to implement measures to identify opportunities to impose fines and penalties on both the executives and their employers

Problem #4: Mobile executives (continued)

Analysis/Alternatives: There is no comprehensive solution you can buy to solve this problem (technology is emerging, but costly to implement); each company’s facts and circumstances will determine the best course of action Key decisions to consider:   Manage initiative with in-house resources vs. seek expert guidance   Automated vs. manual income sourcing and withholding tax calculations   What to do with past non-compliance

Problem #4: Mobile executives (continued)

Solutions/Best Practices:   Evaluate how mobile stock plan participants are identified/tracked and roughly quantify exposure by calculating outstanding equity awards held by affected population   Group mobile participants into “groups” (e.g., tax equalized expats, TCNs, short-term assignees, business travelers, cross-border commuters, etc.)   Develop a strategy to sequentially address each group over a realistic time frame

Problem #5: Currency issues

What: When the base currency of equity awards fluctuates in value relative to the currency of the participant, the ultimate value delivered also fluctuates

Why you should care: Currency translation can result in unintended level of equity compensation for participants located outside the HQ country where the underlying stock is traded

When coupled with additional “costs” (conversion spread markup + international bank wire fee) paid by the participant to convert the proceeds into the participant’s home currency, company may end up delivering substantially less equity compensation value than intended

Problem #5: Currency issues (continued)

Analysis/Alternatives:   Often companies do not consider how currency translation can result in unfair grant levels between HQ country participants and non-HQ country participants   Currency risk is real and can be considerable to overseas participants who get shares of their HQ company as part of his compensation package

Problem #5: Currency issues (continued)

Solutions/Best Practices:   Evaluate current equity grant practice and determine whether currency fluctuation has created unfair grant levels between HQ and key overseas countries   Compare the net cash benefit (after all costs) realized by HQ participants and non-HQ participants on a per-share-granted basis   Assess whether currency risk is adequately disclosed in participant communications and take corrective measures to increase awareness and transparency of the risks and costs involved

What: Regulatory and tax positions taken by governments can change

Examples include India’s fringe benefits tax, and more recently, Australia deciding to tax stock options at vesting

Why you should care: With the current economic situation and as knowledge about and understanding of equity compensation plans improves, more countries are changing their securities and tax regulations to cover these plans and taking more pro-active steps to enforce compliance

Problem #6: Dealing with Regulatory/Tax Position Changes

Problem #6: Dealing with Regulatory/Tax Position Changes (continued)

Analysis/Alternatives:   Companies must determine the extent to which they will monitor and comply with international regulatory and tax changes   The level of compliance may be related to how much equity compensation is granted within the country, the number and level of the participants to which it is granted and the potential penalties for non-compliance

Problem #6: Dealing with Regulatory/Tax Position Changes (continued)

Solutions/Best Practices: Each company must do their own cost/benefit analysis to determine their risk tolerance Some of the things to consider are:   Where compliance is absolutely required   Which countries enforce most aggressively   Cost for not complying   Current vs. future costs   Internal vs. external costs

Problem #7: China – SAFE Filing & Compliance

What: While the Chinese foreign exchange control regulations now provide a facility to obtain an approval to award shares of non-Chinese companies to Chinese nationals, the approval process is costly, lengthy, and the outcome uncertain

Why you should care: Many companies, especially those involved in manufacturing have long been invested in China as a source of labor

Equity compensation is becoming more a part of the total compen-sation package necessary to attract and retain Chinese employees

The Chinese government has made it clear, now that the regulations are well understood, that they will require compliance

Analysis/Alternatives:   Generally, SAFE approval must be received before equity plans can be implemented and the special-purpose foreign exchange account is opened   All cash proceeds from the sale of equity compensation plan shares must be repatriated to China – and it is the company’s responsibility to ensure this occurs   Participants are allowed to hold shares, but it may be difficult to track them and meet the repatriation requirements

Problem #7: China – SAFE Filing & Compliance (continued)

Solutions/Best Practices:   The easiest way to enforce repatriation is to require same-day sale exercises and immediate sale for restricted stock and stock purchase shares   Work with broker to ensure all proceeds from these transactions are sent to the corporation instead of the participant

Problem #7: China – SAFE Filing & Compliance (continued)

Problem #8: Denmark – Acquired Rights

What: Some countries are more protective of the employee’s rights and may over-rule equity award terms and conditions concerning forfeiture in case of termination (Denmark has been such a country)

Why you should care: Company may be required to settle equity awards in unfavorable situations

In addition, risk incenting undesirable employee behaviors

Problem #8: Denmark – Acquired Rights (continued)

Analysis/Alternatives:   Inaction allows risk to remain unchecked   However, taking precautionary steps to avoid issues does not guarantee success   Danish Contracts Act indicates that specific contract terms may be set aside by Danish courts if deemed unreasonable

Problem #8: Denmark – Acquired Rights (continued)

Solutions/Best Practices:   Include explicit language in grant agreements stating:

• Grants are not customary, but are voluntary, occasional and do not create any contractual or other right to receive future awards even if awarded repeatedly in the past,

• Employment through the entire vesting period is a condition of the award, • No claim or entitlement to compensation or damages shall arise from forfeiture of the Award resulting from termination and that grantee waives the ability, if any, to bring any such claim.

  May limit risk by including a performance-based vesting element   Require explicit acceptance of grant agreement terms & conditions   Partner with affiliates to ensure local employments contracts do not conflict with the terms and conditions of grant agreements   Work with legal counsel on specifics

Problem #9: Russian Federation – Recent Securities Regulations

What: Historically, many non-Russian companies have relied on the fact that grants were not supported by underlying Russian shares nor traded on a Russian exchange as rationale that the grants would not be governed by Russian securities law

However, in 2009, the Federal Service for Financial Markets (FSFM) indicated registration may be required even if the shares were not “Russian” company shares

Why you should care: To date, though verbal guidance has been provided, no formal guidance to the contrary has been provided by FSFM. In this context,   the FSFM could exercise significant discretion in evaluating the legality of foreign issuers granting to Russian employees, and as a result,   And as a result, granting in Russia could lead to undesired consequences

Problem #9: Russian Federation – Recent Securities Regulations (continued)

Analysis/Alternatives: Some foreign companies have found sufficient comfort in the head of FSFM’s verbal (hence, unofficial) guidance that the May 2009 amendments do not apply to employee share plans A publication of said clarification was promised but never delivered, leaving room for interpretation to the contrary   Place equity awards in Russia on indefinite hold   Operate under the “old” assumptions   Mitigate potentially adverse consequences   Obtain a private ruling from the FSFM

Solutions/Best Practices: Though all options may be viable, when operating within a highly regulated industry, it is advisable that a private ruling be obtained

Other Potential Pitfalls

Determination of various FMVs for tax purposes   Italy, Malaysia, Russian Federation, Thailand   Regardless of obligation to withhold   Depending on volatility of company stock price, may be significant

Israel: Withholding required upon sale of shares   Nearly impossible to manage, especially with former employees   Israeli Tax Authority (ITA) Ruling to tax at vest, lapse or payout

Other Potential Pitfalls (continued)

 United Kingdom: Complying with requirements of NIC transfer   If making changes to Plan, may need to obtain re-approval of

joint election from HMRC

 United States: Preparing for IFRS2  Consider length of vesting period now  Avoiding liability accounting with sell-to-cover  Explicit acknowledgement of Grantee acceptance

Thank you!

 Barbara Richley, barbara.richley@etrade.com  Brian Ruff, ruff@lilly.com  Jewon Wee, jewon.wee@ispadvisors.com

Disclosures

Eli Lilly, E*TRADE and ISP Advisors are independent companies and are not affiliated.

The information contained in this presentation has been prepared by ISP Advisors, LLC, Eli Lilly & Company and E*TRADE Financial Corporate Services, Inc., each of which is responsible for their own content. E*TRADE Financial Corporate Services does not recommend or endorse these companies or their product and service offerings.

The E*TRADE FINANCIAL family of companies provides financial services that include trading, investing, related banking product and services to retail investors, and managing employee stock plans. The E*TRADE FINANCIAL family of companies provides financial services that include trading, investing, related banking product and services to retail investors, and managing employee stock plans. Employee stock plan solutions are offered by E*TRADE Financial Corporate Services, Inc. Securities products and services offered by E*TRADE Securities LLC, Member FINRA/SIPC. E*TRADE Financial Corporate Services, Inc. and E*TRADE Securities are separate but affiliated companies. The laws, regulations and rulings addressed by the products and, services and publications offered by E*TRADE Financial Corporate Services, Inc. are subject to various interpretations and frequent change. E*TRADE Financial Corporate Services, Inc. does not warrant these products, and services and publications against different interpretations or subsequent changes of laws, regulations and rulings. E*TRADE Financial Corporate Services, Inc. and its affiliates do not provide legal, accounting or tax advice. Always consult your own legal, accounting and tax advisers.

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