Understanding Share Purchase Rights (SPRs): A Guide for Employees

Equity compensation is a powerful tool companies use to attract, retain, and motivate employees. While stock options and Restricted Stock Units (RSUs) are common, Share Purchase Rights (SPRs) are another form of equity that you might encounter. This article will break down what SPRs are, how they work, and what you need to consider if you have them as part of your compensation package.

What are Share Purchase Rights?

Share Purchase Rights (SPRs), also sometimes called Employee Share Purchase Plans (ESPPs), give you the right, but not the obligation, to purchase company stock at a discounted price during a specified period. Essentially, the company is offering you a chance to buy their shares at a bargain. This differs from stock options which give you the right to buy shares at a set price (exercise price) in the future, and RSUs which vest and convert into actual shares.

Key Characteristics of SPRs:

• Discounted Purchase Price: The most attractive feature of SPRs is the discount they offer on the current market price of the company stock. This discount can range from a few percent up to 15%, or even higher in some cases.

• Offering Period: SPRs operate within defined offering periods. You can usually enroll at the beginning of these periods and then make payroll deductions over a set time (often 6 months to 2 years).

• Purchase Date: At the end of the offering period, your accumulated funds are used to purchase company stock at the discounted price, usually based on the lower of the stock price at the start or the end of the offering period.

• Look-back Provision: Many SPR plans include a "look-back" provision, which is beneficial to employees. This means the purchase price is determined by comparing the stock price at the beginning and end of the offering period. You then get to buy the stock at the discounted price of whichever price was lower.

• Payroll Deductions: To participate in an SPR, you typically authorize payroll deductions for a certain percentage of your salary. These deductions are used to accumulate the funds needed to buy shares.

• Participation Limits: There are generally limits on how much stock you can purchase through SPRs, either in terms of dollar amount or a number of shares. These limits prevent individuals from over-investing.

How Do Share Purchase Rights Work?

Let's walk through an example to illustrate how an SPR plan typically functions:

Example: Acme Corp's Share Purchase Plan

Acme Corp offers an SPR plan with the following details:

• Discount: 15%

• Offering Period: 6 months (Jan 1 - June 30)

• Look-back Provision: Yes

• Enrollment Period: December 1-15

• Maximum Contribution: 10% of your pre-tax salary

• Purchase Date: June 30

Scenario:

1. Enrollment: Sarah, an employee at Acme Corp, decides to enroll in the SPR plan. She elects to contribute 5% of her $100,000 annual salary through payroll deductions.

2. Payroll Deductions: Over six months, she has $2,500 (5% of $100,000 / 2) deducted from her paycheck.

3. Stock Prices:

   • January 1st (Beginning of Offering Period): Acme Corp stock price is $50 per share.

   • June 30th (End of Offering Period): Acme Corp stock price is $60 per share.

4. Look-back Comparison: The company compares the beginning and ending prices.

5. Purchase Price: Because the look-back provision is in place, the purchase price for Sarah will be 15% off the lower of $50 or $60. This means Sarah gets to purchase shares at ($50 * 0.15) = $42.50 per share.

6. Shares Purchased: Sarah is able to purchase $2500 worth of shares. She will receive $2500 / $42.50 = 58.82 shares.

7. Potential Gain: Sarah can now decide to either hold these shares or sell them and potentially make a profit if the price rises further.

Key Considerations for Employees:

• Financial Situation: Before enrolling, evaluate your financial situation. Can you comfortably afford to have a percentage of your salary deducted? Is it wise to invest that money in company stock?

• Company Performance: SPRs can be a good deal when the company is doing well, and the stock price is expected to increase. Evaluate the health and growth prospects of your company.

• Diversification: Avoid putting all your eggs in one basket. Over-investing in company stock can be risky. SPRs should not form the majority of your investment portfolio. Aim for a diversified portfolio with other assets.

• Tax Implications: SPRs can have tax implications. Consult a tax professional or the company's human resources department to understand how SPRs are taxed. Generally, when you sell the shares, you will be taxed on any profits as capital gains. When you purchase them, the difference between the discounted price and the actual price is usually taxed as regular income, so you may also see tax implications when the shares are purchased, depending on your country.

• Blackout Periods: Be aware of any blackout periods that restrict when you can sell your shares after the purchase date.

• Company Plan Rules: Carefully review the specific terms of your company's SPR plan. This includes the discount rate, offering periods, look-back provisions, contribution limits, etc.

Benefits of Participating in an SPR Plan:

• Discounted Stock Purchase: The main benefit is that you can buy stock at a discount, increasing your potential for profit.

• Forced Savings: The payroll deduction system encourages saving, which can be beneficial for those struggling with saving.

• Alignment with Company Success: SPRs help align employees with company performance. When the company does well, your shares increase in value.

Drawbacks of Participating in an SPR Plan:

• Risk of Loss: If the company's stock price declines, your investment could lose value.

• Lack of Diversification: Concentrating too much of your portfolio in your company's stock can be risky, reducing diversification.

• Illiquidity: There are restrictions on selling the shares you acquire.

Share Purchase Rights can be an attractive component of your compensation package. They offer an opportunity to purchase company stock at a discount and potentially profit. However, it's crucial to understand the plan's details, evaluate your financial situation, and consider the risks involved. By doing your due diligence, you can make an informed decision about whether to participate in your company's SPR plan. If you are unsure about the best course of action, consider speaking with a financial advisor or tax professional for personalized advice.