Qualified Employee Stock Purchase Plan

Summary

This employee stock purchase plan (ESPP) is designed to meet the requirements of I.R.C. § 423. Corporations can use such qualified ESPPs to grant to their employees (and employees of certain affiliates) option rights to purchase company stock that are eligible for favorable tax treatment under I.R.C. § 421. In addition, qualified ESPP purchase rights can have exercise prices that are up to 15% less than the stock's fair market value (determined either as of the grant date or the purchase date). This template includes practical guidance, drafting notes, and alternate and optional clauses. This ESPP permits eligible employees to contribute a portion of their compensation to the plan for the purchase of company stock on specified periodic purchase dates. Such plans are frequently offered to encourage stock ownership among their employees. Broad-based employee share ownership can be an effective incentive tool and promote unity of corporate purpose. Qualified ESPP sponsors face more restrictions in plan design and operation than sponsors of nonqualified ESPPs, which do not confer as favorable tax treatment as qualified ESPPs. For example, qualified ESPP participants are limited to employees of the issuer or certain of its affiliates. Whether qualified or nonqualified (and regardless of whether there is a discount on the stock purchase price), ESPP participants can benefit from being in the plan due to (1) savings in brokerage costs and charges made on a plan-wide basis instead of individual purchases, (2) convenience of automatic salary deduction contributions and automatic share purchases, and (3) savings on expenses commonly borne by the plan sponsor (e.g., custodian bank charges). For a full listing of key content covering equity incentive plan considerations, see Equity Incentive Plan Resource Kit. For additional guidance on qualified ESPPs, see Qualified Employee Stock Purchase Plan Design and Compliance, Qualified ESPP Drafting Checklist, Board Resolutions: Qualified ESPP Adoption. For a nonqualified ESPP, see Employee Stock Purchase Plan (Nonqualified). For an ESPP participation, change election, and withdrawal form, see Employee Stock Purchase Plan Subscription Agreement.