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Equity-based incentives

Share options What are the most common types of share option plan in your jurisdiction? Please outline the rules relating to each scheme.

In general, employee share plans (and other employee participation plans) are uncommon in Germany as there are no substantial tax benefits. Therefore, the total number of employee share plan participants in Germany is relatively small compared with other European countries.

However, employee share plans are rather common in public limited companies (eg, AGs (corporations limited by share ownerships), KGaAs (partnerships limited by shares) and European companies (societas Europaea)), in particular those belonging to an international group (especially with a parent company in the Unites States). Employee share plans are less common in small and medium-sized companies, except start-up companies. This often corresponds with the legal form of such companies, such as companies with limited liability. Such companies cannot grant real shares or options; they must operate with other plans which grant virtual shares. (For further details please see the explanation below.)

There are no different types of share option plans. However, the following rules must be observed when granting the option to acquire real shares:

  • Employers should conduct a discretionary granting of share options while observing the general rules of equal treatment.
  • Shares to be granted must either be purchased on the market (Section 71(1) 8 of the Stock Corporation Act) or created through a contingent capital increase (Section 192(2) 3 of the Stock Corporation Act).
  • The maximum value of shares must amount to 10% of the company’s nominal share capital.
  • The volume of options for board members must be in reasonable proportion to the total remuneration.
  • The exercise price must be significantly lower than the real stock price.
  • Vesting and waiting periods must be standard. Vesting periods usually vary between three and five years. The minimum waiting period is four years (Section 193(2) 4 and Section 71(1) 8 of the Stock Corporation Act). However, from an employment perspective, vesting or waiting periods, or a combination of both, should not exceed five years.
  • Share option plans sometimes stipulate additional holding periods that prohibit a prior sale of acquired shares. There are no statutory time limits; however, a period of between five and 10 years should be possible.

What are the tax considerations for share option plans?

In a share option plan, the taxation of employee benefits can take place when granting or executing the option and transferring shares.

Share acquisition and purchase plans What are the most common types of share acquisition and purchase plan in your jurisdiction? Please outline the rules relating to each scheme.

There are two types of share acquisition or purchase plan:

  • The company offers employees the right to purchase shares, normally at a discounted share price below fair market value.
  • The company offers employees the right to purchase shares at fair market value and will grant additional shares at no cost. These additional shares are often ‘restricted’, meaning that they cannot be transferred until particular time or performance-based conditions are met.

The maximum value of shares amounts to 10% of the company’s nominal share capital (with respect to vesting, waiting and holding periods, please refer to the above explanation of share option plans.) However, vesting periods are generally extraordinary in share purchase plans unless in the form of a restriction (as described above).

What are the tax considerations for share acquisition and purchase plans?

Any discount granted when acquiring shares is subject to taxation for employees. A tax exemption of up to €360 per year is possible on an employee share purchase plan if the plan is open to all employees and further requirements are met.

Phantom (ie, cash-settled) share plans What are the most common types of phantom share plan used in your jurisdiction? Please outline the rules relating to each scheme.

The most common types are phantom share plans and share appreciation rights.

However, neither are common in Germany. In both plans, the employee does not receive real shares, but instead participates in the development of the listed share price.

In the case of phantom stocks, the contractual agreement provides for a treatment which is the economic equivalent of the share acquisition plan. Share appreciation rights are the economic equivalent to share option plans.

Comparable to share option plans, phantom share plans and share appreciation rights normally provide for time and performance-based vesting conditions. (For further details please see the above explanation of share option plans).

What are the tax considerations for phantom share plans?

Employees have to pay tax on phantom share plans.

Consultation Are companies required to consult with employee unions or representative bodies before launching an employee share plan?

Provided that the company issuing an employee share plan has a works council, it has various consultation and codetermination rights regarding the implementation of the above types of employee share plan under Section 87(1)(10) of the Works Constitution Act. In this case, the employer must enter into an agreement with the works council setting out the principles of the distribution of shares and the technical and formal aspects of the particular plan. If a share plan concerns executive employees, the spokesperson committee – which is to some extent the equivalent to the works council for such employees – must be informed and consulted.

Further information and consultation rights may exist in view of payment details and possible technical monitoring (Sections 87(1)(4) and (6) of the Works Constitution Act).

However, the number of shares included in a plan and eligible employees are generally not subject to information rights or the works council’s consultation rights. Information and consultation rights do not exist if the share plan applies only to members of the management board.

Further, the works council is entitled to access all necessary documents and request competent employees to provide information.

If a share plan is implemented by a foreign parent company and the German employer will neither grant the shares nor guarantee this in connection with the employment, no consultation or codetermination with the German works council is required. The works council can require only the aforesaid general information with regard to the share plan. 

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