Presentation Transcript

1. Confessions of a SpinCo:TripAdvisor’s recent spin-off experience and its impact on employee stock plans July 19, 2013
2. 2 Overview TripAdvisor: At a Glance A Fresh Start – Sort Of The Netting Initiative A Shift in Philosophy
3. 3 TripAdvisor: At a Glance TripAdvisor® is the world's largest travel site, enabling travelers to plan and have the perfect trip. TripAdvisor offers trusted advice from real travelers and a wide variety of travel choices and planning features with seamless links to booking tools. TripAdvisor branded sites make up the largest travel community in the world, with more than 200 million unique monthly visitors, and over 100 million reviews and opinions covering more than 2.5 million accommodations, restaurants, and attractions. The sites operate in 30 countries worldwide, including China under daodao.com. TripAdvisor also includes TripAdvisor for Business, a dedicated division that provides the tourism industry access to millions of monthly TripAdvisor visitors.
4. 4 A Fresh Start – Sort of The Spin On December 20, 2011 TripAdvisor was spun-off from Expedia Spin mechanics Immediately prior to the spin-off, Expedia effected a 1-for-2 reverse split As a result of the reverse split and spin-off, every 2 shares of Expedia were converted into: One share of EXPE One share of TRIP
5. 5 A Fresh Start – Sort of The Spin What happen to equity awards? Conversion ratios were applied to preserve intrinsic value But trailing obligations to non-employees were created by both EXPE & TRIP
6. 6 A Fresh Start – Sort of The Spin IAC’s history of divestitures - with similar spin mechanics - only further complicated the situation Options settling in TRIP were also held by employees of: Options held by TRIP employees settled in stock of the following companies: A long, material trail of non-employee / former SpinCo obligations THE RESULT A significant % of TRIP options were held by non-employees
7. 7 A Fresh Start – Sort of A New Vendor Administration of non-employee awards Initially, all SpinCos resided on the same vendor platform This permitted sharing of employee indicative data across databases Intra-SpinCo reporting was still required to handle ongoing payroll and accounting obligations In Q1 2013, TRIP selected a new stock plan vendor
8. 8 A Fresh Start – Sort of A New Vendor TRIP’s move to the new vendor offered an opportunity to revisit the challenges and risks presented by administering non-employee equity awards TRIP proposed that each employer would be responsible for administering the awards of only its own employees Each employer would administer awards that settle in multiple CUSIPs through their existing recordkeeper
9. 9 A Fresh Start – Sort of A New Vendor The proposal (in detail) TRIP SpinCos Objectives Simplify participant experience Enhance independence / controls Minimize operational risk Reduce administrative burden
10. 10 A Fresh Start – Sort of A New Vendor July 1 Old Vendor - FROZEN Pre Conversion July 1 New Vendor - LIVE July 1 Old Vendor - LIVE Trip Data “Before and After” All TRIP and SpinCo Employees’ Activity through June 28. This data will remain available for employees and corporate to view activity through June 28 TRIP only employees: TRIP Stock Outstanding and Not Outstanding SpinCo Stock: Outstanding and Not Outstanding Spin-Co only employees: TRIP Stock Outstanding and Not Outstanding All TRIP and SpinCo Employees Reside at old vendor Going forward – Data from two vendors captures all TRIP Stock related transactions Going forward – This database stays static
11. 11 The Netting Initiative In Q1 2013, the Company made a push to be less dilutive (i.e., BOD approved stock buyback program and implemented strict share pool management procedures) The poster child of which was a “netting” initiative for equity With the exception of mobile employees, no one received a free pass. The initiative applied to: Outstandingand prospectiveawards RSUsand stock options Exercise costs and taxes Section 16 officersand rank-and-file employees Domesticand foreignparticipants The administrative and technical barriers to implementing the netting initiative were numerous
12. 12 The Netting Initiative Administrative Considerations Net settlement of RSUs is old hat for most administrators Net settlement of stock options is another story Q: What are net exercises? Example An employee holds an option to purchase 100 shares with an exercise price of $10 per share. The employee exercises the option when the FMV is $25 per share. A: When a participant tenders a portion of the shares exercised back to the company to cover the exercise price and taxes due 55% fewer shares issued * EXERCISE COST (100 shares exercised x $10 price) / $25 FMV = 40 shares TAXES [($15 per share spread x 100 shares exercised) * 25% tax rate] / $25 FMV = 15 shares
13. 13 The Netting Initiative Administrative Considerations TripAdvisor was fortunate that the netting initiative was launched immediately prior to its vendor search Relatively few vendors were able to preserve the pre-initiative user experience (i.e., the ability to exercise and immediately sell the shares) Given that fewer shares are on the table, increased vendor fees are a possibility TripAdvisor Guiding Principal Participants would not view the initiative as a “take away” TAKE AWAY #1: TAKE AWAY #2:
14. 14 The Netting Initiative Technical Considerations An oversimplified view of the world XYZ Inc. Foreign Tax Laws US Accounting Rules Employee Tax Authorities
15. 15 The Netting Initiative Technical Considerations Accounting rules US GAAP (ASC 718-10) The risk Different Methodologies Beget Different Accounting Considerations If shares withheld, there’s a risk of triggering variable accounting for the entire award If cash withheld, similar risk is not present Can the risk be avoided? Yes - fixed accounting can be preserved if withholding occurs at a rate that does not exceed the “minimum statutory rate” Minimum Statutory Rate
16. $30 Stock Price $30 Stock Price $20 $20 $10 $10 $0 $0 Grant Settlement 16 The Netting Initiative Technical Considerations Accounting rules US GAAP (ASC 718-10) Why do we care? Your finance team likely fought long and hard to ensure “fixed” accounting – and the predictability it brings. ASC 718 ACCOUNTING TREATMENT OF EQUITY INSTRUMENTS ASC 718 ACCOUNTING TREATMENT OF LIABILITY INSTRUMENTS Charge to Earnings Charge to Earnings 2 4 6 7 8 9 10 Years 0 5 1 3 6 2 4 7 8 9 10 0 5 Years 1 3 Issuance Settlement Charge to earnings = fair value determined via option pricing model Award is revalued each year (or quarter) from grant to settlement; the additional charge (or credit) is marked-to-market Subsequent stock appreciation / depreciation will increase / decrease the charge to earnings Charge to earnings = fair value determined via option pricing model Charge is fixed at grant and recognized ratably over vesting period Subsequent stock appreciation / depreciation will not increase / decrease the charge to earnings
17. 17 The Netting Initiative Technical Considerations Tax Laws How do we determine the “minimum statutory rate”? In the US Includes federal, state and local taxes (including payroll taxes) Federal Supplemental withholding rates (25% / 39.6%) generally accepted as satisfying the accounting requirements FICA / Medicare withholding is also required States Only some have supplemental rates If no supplemental rate exists, then treat like the foreign countries
18. 18 The Netting Initiative Technical Considerations Tax Laws How do we determine the “minimum statutory rate”? Outside the US Most companies will have withholding requirements in 1/3 to 1/2 of the countries in which they make grants And the list may be growing! Very few countries have supplemental or flat withholding rates that apply to equity compensation
19. 19 The Netting Initiative Technical Considerations Tax Laws How do we determine the “minimum statutory rate”? Outside the US (continued) Most countries require companies to withhold at individual rates depending on: The employee’s marginal tax bracket Various deductions / exemptions / martial status, etc Social tax wage caps often applied on a monthly basis This means that withholding rates vary by individual and may vary during the course of the year Expats Industry advocates requested that FASB allow “hypo” tax for expatriates to be withheld in shares – FASB declined
20. 20 The Netting Initiative Technical Considerations Tax Laws Example German employee earning €100,000 annually exercises an option on January 1st vs. August 1st - What rate is the minimum statutory rate? 45% 42% € 250,731 and over 14% Rate € 52,882 – 250,730 0% € 8,131– 52,882 € 0 – 8,130 Tax Base
21. 21 The Netting Initiative Technical Considerations TripAdvisor’s Challenge RSUs Taxable events are more visible, more predictable It’s comparatively “easier” to get actual rates because of the ability to plan ahead Options Exercises are more arbitrary, more real-time Requires a fire drill to determine an employee’s actual rate
22. 22 The Netting Initiative Technical Considerations TripAdvisor’s Solution Pre-Code Actual Individual Rates on a Monthly Basis
23. 23 The Netting Initiative Technical Considerations Legal Does the plan allow net exercises? Can the requirement be imposed retroactively? May not be necessary if option agreements defer to the plan
24. 24 A Shift in Philosophy Equity under the old regime An Exercise in Selectivity Equity post-spin Broad-Based Eligibility
25. 25 A Shift in Philosophy Drivers of change Desire to better align employee interests with those of shareholders Competitive pressures to attract and retain top talent Desire to grow ownership in friendly hands
26. 26 Contact Information: Yoon Park TripAdvisor, Inc. Director of Global Compensation and Equity Email: ypark@tripadvisor.com Phone: 617-670-6717 Geoff Hammel ISP Advisors LLC Managing Director Email: geoff.hammel@ispadvisors.com Phone: 215-GET-ISPA (215-438-4772)