Employee share plans in China: regulatory overview

A Q&A guide to employee share plans law in China.

The Q&A gives a high level overview of the key practical issues including, whether share plans are common and can be offered by foreign parent companies, the structure and rules relating to the different types of share option plan, share purchase plan and phantom share plan, taxation, corporate governance guidelines, consultation duties, exchange control regulations, taxation of internationally mobile employees, prospectus requirements, and necessary regulatory consents and filings.

To compare answers across multiple jurisdictions, visit the Employee Share Plans: Country Q&A tool.

The Q&A is part of the global guide to employee share plans law. For a full list of jurisdictional Q&As visit www.practicallaw.com/employeeshareplans-guide.

Contents

Employee participation

1. Is it common for employees to be offered participation in an employee share plan?

It is not particularly common for employees to be offered participation in an employee share plan. However, listed companies (and companies held by listed companies) tend to offer their key employees the option to participate in share plans to encourage better performance and longer service.

 
2. Can employees be offered a share plan where the shares to be acquired are in a foreign parent company?

Generally, it is lawful to offer participation in an employee share plan if the shares to be acquired are shares in a foreign parent company. However, if the shares to be acquired are shares in a company listed overseas, the share plan is subject to certain exchange control restrictions (see Question 25).

 

Share option plans

3. What types of share option plan are operated in your jurisdiction?

The following types of share option plan are operated in China:

  • Share option plan.

  • Restricted share plan.

Both types of plan can be combined under one plan.

The law does not refer to the operation of employee share plans in private companies. As a result, these plans apply to employee share plans in listed companies. The operation of an employee share plan in a private company depends to a large extent on the terms of the plan.

Share option plan

Main characteristics. Under a share option plan, the company grants the employee the option to purchase a stated number of shares at a predefined price and under certain conditions within the option term. The following restrictions apply:

  • The option granted cannot be transferred, used as security or used to settle debts, but can be discarded by the employee.

  • The option term must not exceed ten years from the date of grant, and the time between the date of grant and the date of initial exercise must not be less than one year.

  • The exercise price or the method used to define the exercise price must be provided at the time of grant (Article 24, Measures Governing Equity Incentive Plans of Listed Companies (For Trial Implementation)).

  • The company must require the employee to exercise the option in instalments. There are no requirements as to the number of instalments and when they can be exercised.

Types of company. Any type of listed company can offer share option plans.

Popularity. The share option plan is currently the most popular type of plan among listed companies.

Restricted share plan

Main characteristics. Under a restricted share plan, the employee has the option to acquire a certain number of shares when the terms provided in the share plan are met. The following restrictions apply:

  • The employee cannot take possession of the shares until specified restrictions lapse. Common restrictions include the employee's length of service and performance goals set for the company or employee.

  • The company can decide the grant price or the method to define the grant price.

  • There is a minimum period during which an employee cannot sell the acquired restricted shares. For listed companies, the period is 12 months. For state-controlled listed companies, the period is two years.

Types of company. Any type of listed company can offer restricted share plans.

Popularity. This is the second most popular plan among listed companies.

 

Grant

4. What rules apply to the grant of employee share options?

All types of share option plan

Discretionary/all-employee. The options do not have to be offered to all employees. However, the plan must specify clear standards concerning which employees can be offered the options and on what terms the offer must be made.

Non-employee participation. Generally, the options can only be granted to employees. The options can be granted to employee directors but cannot be granted to independent directors.

Maximum value of shares. If the company (whether listed or private) acquires its own shares (buyback) by awarding its shares to employees, the shares must not exceed 5% of the total shares already in issue. For listed companies, there is a maximum value of shares that can be granted under all of the company's valid employee share plans:

  • The total number of shares involved in all of the company's valid employee share plans must not exceed 10% of the company's total share capital.

  • The total number of shares that any one employee can acquire through all of the company's valid employee share plans must not exceed 1% of the company's total share capital, unless approved by a special resolution at a general meeting of the shareholders.

Market value. The options do not necessarily need to have an exercise price equivalent to market value at the date of grant. Listed companies must provide an exercise price or the method to define an exercise price at the time of grant. This exercise price must be at least equivalent to the higher of either:

  • The closing price of the shares to be granted on the last trading day before the abstract of the plan (draft) is published.

  • The average closing price of the shares to be granted within the last 30 trading days before the abstract of the plan is published.

 
5. What are the tax and social security implications of the grant of the option?

All types of share option plan

Favourable tax treatment applies only to listed companies and some of their controlled companies. However, favourable tax treatment does not apply if either:

  • The share plan is set up before the company becomes listed and the employees receive the award after the company becomes listed.

  • The listed company fails to report the share plan to, and file certain documents with, the tax authority before executing the share plan.

Generally, no tax and social security obligations arise from the grant of the option.

Vesting

6. Can the company specify that the options are only exercisable if certain performance or time-based vesting conditions are met?

All types of share option plan

The company can specify that the options are only exercisable if certain performance or time-based vesting conditions are met. The China Securities Regulatory Commission requires listed companies to set performance, time-based or other vesting conditions, and to establish a related performance evaluation scheme.

 
7. What are the tax and social security implications when the performance or time-based vesting conditions are met?

All types of share option plan

There are no tax and social security contributions payable when performance or time-based vesting conditions are met.

 

Exercise

8. What are the tax and social security implications of the exercise of the option?

Share option plan

Tax obligations arise when the share option is exercised. The employee is taxed on the amount that constitutes the difference between the market value of the shares and the amount paid by the employee for acquiring the shares. This amount is treated as part of the employee's salary income and taxed according to the individual's income tax rate. As this is not cash income, it generally does not have social security implications for the employer and the employee.

Accounting for tax/social security. When tax obligations arise at the time of exercise, the employer must report the employee's income to the competent tax authority, and it must withhold and remit personal income tax on behalf of, and at the cost of, the employee. Increases in social security contributions, if any, will affect the employee and the employer in the following year.

How liability is recovered from the employee. Individual income taxes are paid with the employee's money (see above, Accounting for tax/social security). The employer does not have to pay taxes under share option and restricted share plans.

Restricted share plan

The employee may be subject to a holding period after the share rights are vested. During the holding period, the employee cannot sell the shares. Tax obligations arise when the holding period expires. The value of the restricted shares is considered to be part of the employee's salary income and is subject to individual income taxes at the employee's rates. As this is not cash income, it generally does not have social security implications for the employer and the employee.

Accounting for tax/social security. See above, Share option plan.

How liability is recovered from the employee. See above, Share option plan.

 

Sale

9. What are the tax and social security implications when shares acquired on exercise of the option are sold?

All types of share option plan

When acquired shares are sold under both share option plans and restricted share plans, there are no individual income tax implications arising from the sale of the shares by the employee (that is, when the employee sells the shares of a company listed on the secondary market in China). In addition, as the earnings do not constitute salary income for the employee, there are no social security implications.

Regular transaction fees and taxes apply when employees sell the shares (which are the same as for anybody who sells shares on the secondary market).

 

Share acquisition or purchase plans

10. What types of share acquisition or share purchase plan are operated in your jurisdiction?

Under the employee share purchase plan (ESPP), employees can purchase the employer's shares at a discounted price. Employees can set aside money over a period of time (called an offering period), usually out of taxable payroll deductions, to purchase the employer's shares at the end of the offering period. There may or may not be a holding period after the employees purchase the shares.

China does not clearly classify or have special regulations on ESPPs. ESPPs are not prohibited by laws and regulations. The following answers regarding share purchase plans are based on analogy with share option plans and restricted shares plans.

Types of company. Any type of company can offer ESPPs.

Popularity. This type of plan is not popular.

 

Acquisition or purchase

11. What rules apply to the initial acquisition or purchase of shares?

Discretionary/all-employee. Entitlement to acquire shares can be awarded on a discretionary basis.

Non-employee participation. Generally, shares offered under the plan can only be granted to employees. They can be granted to employee directors but not to non-employee independent directors.

Maximum value of shares. If the company (whether listed or private) acquires its own shares (buyback) by awarding its shares to employees, the shares must not exceed 5% of the total shares already in issue.

For listed companies, there is a maximum value of shares that can be granted under all of the company's valid employee share plans:

  • The total number of shares involved in all of the company's valid employee share plans must not exceed 10% of the company's total share capital.

  • The total number of shares that any one employee can acquire through all of the company's valid employee share plans must not exceed 1% of the company's total share capital, unless approved by a special resolution made by the general meeting of shareholders.

Payment for shares and price. Each employee usually uses their own money to buy shares at a specified discounted price. There are no rules on this.

 
12. What are the tax and social security implications of the acquisition or purchase of shares?

Favourable tax treatment applies to listed companies and some of their controlled companies only. Favourable tax treatment does not apply if either:

  • The share plan is set up before the company becomes listed and the employees receive the award after the company becomes listed.

  • The listed company fails to report the share plan to, and file certain documents with, the tax authority before executing the share plan.

Tax obligations only arise if employees are awarded shares at no cost or if they purchase the employer's shares at a discounted price. The discount is considered as part of the employee's salary and is subject to the employee's individual income tax rates. The employer does not have to pay taxes, but may have to deduct and pay taxes on its employees' behalf. As the discount is not cash income for employees, it generally does not have social security implications for the employer and employees.

 

Vesting

13. Can the company award the shares subject to performance or time-based vesting conditions?

There are no rules on this matter. Performance or time-based conditions can be imposed at the employer's sole discretion.

 
14. What are the tax and social security implications when any performance or time-based vesting conditions are met?

Individual income tax obligations do not arise when the performance or time-based vesting conditions are met.

 

Sale

15. What are the tax and social security implications when the shares are sold?

An employee who sells the shares of companies listed in China on the secondary market employee does not pay income tax on the earnings. In addition, as the earnings are not part of the employee's salary income, there are no social security implications. However, if the employee sells the shares of overseas listed companies, the earnings are subject to individual income tax.

When tax obligations arise at the time of selling, the employer must report the employee's income to the competent tax authority, and it must withhold and remit personal income tax on behalf of, and at the cost of, the employee.

 

Phantom or cash-settled share plans

16. What types of phantom or cash-settled share plan are operated in your jurisdiction?

There is one statutory type of phantom share plan in China, that is, the share appreciation rights plan for state-controlled companies listed overseas.

In addition, two other types of phantom share plan are used in practice:

  • Dividend plans for listed companies.

  • Internal valuation plans for private companies.

Share appreciation rights plan for state-controlled companies listed overseas

Main characteristics. Under the share appreciation rights plan for listed companies, the company grants the employee the right to receive the earnings arising from the increase in price of a stated number of shares over a specified period and under specified conditions.

Type of company. This plan is available for state-controlled companies listed overseas and is often used by these companies.

Popularity. This type of plan is only popular with state-controlled companies listed overseas and is not widely used otherwise.

Dividend plan for listed companies

Main characteristics. This plan provides the employee with payments equivalent to the dividends that would be paid on a stated number of the company's shares over a specific period of time.

Types of company. Listed companies can offer this plan.

Popularity. This type of plan is not regulated by Chinese law and is rarely used in companies.

Internal valuation plan for private companies

Main characteristics. This plan provides the employee with a cash payment based on the increase in the internally determined value of a stated number of the company's presumed shares over a specific period of time.

Types of company. Private companies can offer this plan.

Popularity. This type of plan is not regulated by Chinese law and is rarely used in companies.

 

Grant

17. What rules apply to the grant of phantom or cash-settled awards?

Share appreciation rights plan for state-controlled companies listed overseas

Discretionary/all-employee. The awards can be granted on a discretionary basis.

Non-employee participation. Participants can include the listed company's directors, senior management personnel, key technical (business) personnel and other staff and workers to whom the company intends to offer incentives. The options cannot be granted to independent directors.

Maximum value of awards. The total number of shares involved in all of the company's valid employee share plans must not exceed 10% of the company's total share capital.

Dividend plan for listed companies

Discretionary/all-employee. The awards can be granted on a discretionary basis.

Non-employee participation. Participants can include the listed company's directors, senior management personnel, key technical (business) personnel and other staff and workers to whom the company intends to offer incentives. The options cannot be granted to independent directors.

Maximum value of awards. The total number of shares involved in all of the company's valid employee share plans must not exceed 10% of the company's total share capital.

Internal valuation plan for private companies

Discretionary/all-employee. The awards can be granted on a discretionary basis.

Non-employee participation. Participation in this type of plan is not regulated and depends on the terms of the plan.

Maximum value of awards. The maximum value of awards granted under this plan is not regulated and depends on the terms of the plan.

 
18. What are the tax and social security implications when the award is made?

Share appreciation rights plan for state-controlled companies listed overseas

There are no tax and social security contributions payable when the award is made.

Favourable tax treatment applies to listed companies and some of their controlled companies only. However, favourable tax treatment does not apply if either:

  • The plan is set up before the company becomes listed and the employees receive the award after the company becomes listed.

  • The listed company fails to report the plan to, and file certain documents with, the tax authority before executing the plan.

Dividend plan for listed companies

There are no tax and social security contributions payable when the award is made.

Internal valuation plan for private companies

There are no tax and social security contributions payable when the award is made.

 

Vesting

19. Can phantom or cash-settled awards be made to vest only where performance or time-based vesting conditions are met?

Share appreciation rights plan for state-controlled companies listed overseas

The awards can be made to vest only where performance or time-based vesting conditions are met. The China Securities Regulatory Commission requires listed companies to set performance, time-based or other vesting conditions, and to establish a related performance evaluation scheme.

Dividend plan for listed companies

The awards can be made to vest only where performance or time-based vesting conditions are met. The China Securities Regulatory Commission requires listed companies to set performance, time-based or other vesting conditions, and to establish a related performance evaluation scheme.

Internal valuation plan for private companies

The awards can be made to vest only where performance or time-based vesting conditions are met. It is market practice to impose performance or time-based vesting conditions.

 
20. What are the tax and social security implications when performance or time-based vesting conditions are met?

Share appreciation rights plan for state-controlled companies listed overseas

There are no tax and social security contributions payable when the performance or time-based vesting conditions are met.

Dividend plan for listed companies

There are no tax and social security contributions payable when the performance or time-based vesting conditions are met.

Internal valuation plan for private companies

There are no tax and social security contributions payable when the performance or time-based vesting conditions are met.

 

Payment

21. What are the tax and social security implications when the phantom or cash-settled award is paid out?

Share appreciation rights plan for state-controlled companies listed overseas

Tax/social security. Tax obligations arise when the share appreciation rights are settled. This is when the employer makes a payment to the employee of the amount of the share appreciation. This constitutes part of the employee's salary and is subject to the employee's individual income tax rates. In addition, unlike for restricted share plans and share option plans, as share appreciation rights are usually paid out in cash, they may result in increased social security contribution obligations in the following year for both the employer and the employee.

Accounting for tax/social security. When tax obligations arise at the time payment is settled, the employer must report the employee's income to the competent tax authority, and it must withhold and remit personal income tax on behalf of, and at the cost of, the employee. Increases in social security contributions, if any, affect the employee and the employer in the following year.

How liability is recovered from employee. Individual income taxes are paid with the employee's money. The employer does not have to pay taxes under this plan. However, possible social security implications under a share appreciation rights plan affect both the employee and the employer in the following year. The employer cannot recover its increased social security contribution obligations from the employee.

Dividend plan for listed companies

Tax/social security. The payments are treated as dividends rather than salary for individual income tax purposes and are subject to a 10% tax rate.

Accounting for tax/social security. The employer must withhold the 10% dividends' tax when making award payments to the employee. As the awards do not constitute part of the employee's salary, they do not increase the employer and the employee's social security contribution liability in the following year in relation to the employee.

How liability is recovered from employee. See above, Accounting for tax/social security.

Internal valuation plan for private companies

Tax/social security. The awards are treated as salary for individual income tax purposes.

Accounting for tax/social security. The employer must withhold tax when making award payments to the employee. In addition, the awards may increase both the employer and the employee's social security contribution liability in the following year in relation to the employee. The employer cannot recover this increased liability from the employee.

How liability is recovered from employee. See above, Accounting for tax/social security.

 

Corporate governance guidelines, market or other guidelines

22. Are there any corporate governance guidelines, market rules or other guidelines that apply to any employee share plan?

Institutional investor guidelines

There are no widely circulated institutional investor guidelines that apply to employee share plans.

Other shareholder guidelines

There are guidelines for state-controlled listed companies.

Market rules or guidelines

Both the Shenzhen Stock Exchange and Shanghai Stock Exchange have rules regarding equity incentive plans in listed companies that were amended in 2008. In addition, in 2008 the China Securities Regulatory Commission issued three memoranda on equity incentive issues in listed companies.

 

Employment law

23. Is consultation or agreement with, or notification to, employee representative bodies required before an employee share plan can be launched?

If a company makes decisions on important issues regarding its operation, the company must consult its employees and consider their feedback (Article 18, Company Law). If launching an employee share plan is deemed to be an important matter in the company's operation, the company may need to notify, and consider the representations of, its employees. Whether the company is required to consult its employees depends on whether the employee share plan at issue is deemed an important matter in the company's operation. The scale and effect of the plan should be considered. This process may take days or weeks.

When a company makes decisions on important issues or on issues affecting the immediate interests of the employees, those issues and decisions must be discussed by all employees or the employee representative congress, and the company must consult employee representatives or the trade union to make these decisions (Article 4, Employment Contract Law). The company must also place a notice of these decisions in the workplace or notify the employees individually of these decisions. This process may take days or weeks.

 
24. Do participants in employee share plans have rights to compensation for loss of options or awards on termination of employment?

The participants' rights to compensation for loss of options or awards largely depend on the terms of the plan. However, there are specific regulations for state-controlled listed companies.

In addition, many plans stipulate that when an employee is no longer qualified to participate in a plan under the plan's terms and conditions, any grant of options already made under the plan is void.

 

Exchange control

25. How do exchange control regulations affect employees sending money from your jurisdiction to another to purchase shares under an employee share plan?

Chinese residents and foreign persons who have resided within the Chinese territory continuously for one year or more can only invest in foreign financial markets through certain financial institutions set out by regulation.

Individuals participating in an overseas listed company equity incentive plan must collectively entrust a domestic agency to uniformly handle related matters such as foreign exchange registration, account opening and funds transfer and exchange through an affiliated domestic company to which they belong. The individuals must also collectively commission an overseas agency to undertake exercising, purchasing, selling and other relevant capital transfer issues.

The domestic agent must be a domestic company participating in the equity incentive plan or other domestic institutions that are permitted to operate asset custody business and selected by the domestic company in accordance with the law.

The domestic agency must apply to the State Administration of Foreign Exchange for the foreign exchange filing for individuals.

 
26. Do exchange control regulations permit or require employees to repatriate proceeds derived from selling shares in another jurisdiction?

A domestic agent appointed by the individuals participating in an overseas listed company equity incentive plan must go through relevant procedures for funds transfer and settlement of exchange. After the foreign exchange revenues obtained by individuals from participation in the equity incentive plan are remitted into China, the domestic agency must transfer the funds from its special domestic foreign exchange account into the corresponding individual foreign exchange deposit accounts through the bank. The transfer requires the following:

  • The relevant written application.

  • The relevant foreign exchange registration certificate for equity incentive plans.

  • The certificate of the overseas transaction.

  • Other relevant materials.

The funds must be managed and used in accordance with the relevant provisions on individual foreign exchange deposit accounts.

If individuals participating in the equity incentive plan of an overseas listed company receive or pay amounts involving foreign elements through the special domestic foreign exchange account opened by the appointed domestic agency, the agency handles the indirect declaration of international revenues and expenditures statistics in accordance with the relevant provisions on individual foreign exchange deposit accounts.

 

Internationally mobile employees

27. What is the tax position when an employee who is tax resident in your jurisdiction at the time of grant of a share option or award leaves your jurisdiction before any taxable event affecting the option or award takes place?

There is no Chinese tax liability when a resident employee, having been granted an option or award in China, leaves the jurisdiction before any taxable event. However, an employee who remains a China tax resident (because they have spent the requisite number of days in China before they left) must pay tax in China on their income when the taxable event occurs.

 
28. What is the tax position when an employee becomes tax resident in your jurisdiction while holding share options or awards granted abroad and a taxable event occurs?

Share option income attributed to the employee's performance outside of China

At the time of the taxable event, the share option income attributed to the employee's performance outside of China before they arrive in China is not taxable in China, unless the employee is a Chinese tax resident before they arrive in China.

Share option income attributed to the employee's performance in China

At the time of the taxable event, the share option income attributed to the employee's performance in China after they arrive in China is deemed to be China source income and may be subject to China individual income tax depending on the length of time the employee has stayed in China:

  • If the employee has stayed in China for less than 90 days (or 183 days under an applicable double tax treaty), the share option income attributed to the employee's performance in China is not taxable, unless the share option income to the employee is actually paid by a Chinese company. That is, if it is paid by a foreign company, the share option income attributed to the employee's performance in China is not taxable.

  • If the employee has stayed in China for more than 90 days (or 183 days under an applicable double tax treaty), the share option income attributed to the employee's performance in China is always taxable as income.

 

Securities laws

29. What are the requirements under securities laws or regulations for the offer shares under, and participation in, an employee share plan?

A listed company must expressly set out the following in its equity incentive scheme:

  • The equity incentive scheme's objectives.

  • The basis for selecting incentive targets (plan participants) and the scope of this selection.

  • The proposed quantity of rights to be granted under the equity incentive scheme, the class of shares involved, their provenance, quantity and the percentage of the listed company's total share capital for which they account. If the scheme is to be implemented in stages, the proposed quantity of rights to be granted at each stage of the scheme must be set out, as well as the class of shares involved, their provenance, quantity and the percentage of the listed company's total share capital for which they account.

  • If the plan participants are directors and senior management personnel, the share plan scheme must include details of the quantity of rights to which both:

    • each director or member of senior management is entitled (details must be included concerning the percentage this entitlement represents of the total proposed quantity of rights to be granted);

    • other incentive targets (either individually or by appropriate category) are entitled; other incentive targets are core technical staff or core business staff, and other employees who are regarded by the company as eligible for the incentive (the details to include relate to the percentage the entitlement represents of the total proposed quantity of rights to be granted under the equity incentive scheme).

  • The equity incentive scheme's term, grant date, exercise date and the lock-up period for the shares.

  • The grant price (or the method of determining the grant price for restricted shares), or the exercise price (or the method of determining the exercise price) for share options.

  • The conditions for receiving and exercising the rights by the plan participants (for example, the performance assessment system and assessment method, and the performance assessment targets that are the conditions for the eligibility for participation in the equity incentive scheme).

  • The method and procedures for revising the quantity of rights and quantity of shares involved in the equity incentive scheme and the grant price or exercise price.

  • The procedures for granting the rights by the company and the procedures for exercising the rights by the plan participants.

  • The rights and obligations of the company and plan participants in relation to the plan.

  • The method for the plan's implementation in the event of a change in control, merger or division of the company, or a change in the position, departure, death, and so on of a plan participant.

  • The amendment and termination of the equity incentive scheme.

  • Other important matters.

After the company's board of directors has considered and adopted the equity incentive scheme, the listed company must submit the relevant materials to the China Securities Regulatory Commission for filing, with copies sent to the relevant stock exchange and to the securities regulatory bureau of the place where the company is located. Within 20 working days after receiving those materials, if the China Securities Regulatory Commission does not raise an objection, the listed company can issue a notice of general shareholders' meeting, which will review and approve the incentive scheme. However, if any objection is made within this period, the listed company cannot hold the meeting or implement the incentive scheme.

Once the equity incentive scheme has been considered and adopted by the shareholders' general meeting, the listed company must attend both:

  • The stock exchange to manage disclosure matters.

  • The securities depository and clearing agency to deal with the relevant securities depository and clearing matters.

In relation to plan participants intending to exercise their share options or the locking and unlocking of restricted shares, the listed company must, after confirmation of the board of directors or the organisation authorised by the board of directors, submit an exercise application to the stock exchange. After confirmation by the stock exchange, the securities depository and clearing agency must undertake the depository and clearing tasks.

The employee share plan need only be filed once with the China Securities Regulatory Commission (a new filing is not required every time a grant is issued).

 
30. Are there any exemptions from securities laws or regulations for employee share plans? If so, what are the conditions for the exemption(s) to apply?

Exemption(s) for employee share plan offers

There are no exemptions from the requirements set by the securities laws available to employee share plans.

Conditions for exemption(s)

There are no conditions for exemption from the requirements set by the securities laws.

 

Other regulatory consents or filings

31. Are there any other regulatory consents and filing requirements and/or other administrative obligations for an offer of shares under, and participation in, an employee share plan?

A domestic enterprise implementing a share option plan must take the following actions:

  • Before implementation, submit to the competent tax authority the:

    • share option plan or the scheme of its implementation;

    • share option protocol;

    • notice of authorisation; and

    • any other relevant materials.

  • Before the exercise of rights by employees, submit to the competent tax authority:

    • a notice on the exercise of share options;

    • a notice on the adjustment of the exercise of share options;

    • other relevant notices;

    • categories of shares (or share options);

    • quantities of shares (or share options);

    • empower price (also called the grant price, which is the price at which restricted shares are granted to the employees (it may or may not be the market price at the time the restricted shares are granted));

    • exercise price;

    • market price; and

    • transfer price.

State-controlled listed companies must submit the share option plan to the authorities (or departments that perform the duties of state-owned asset contributors) for examination and verification. Where the major shareholders are group corporations, the submission must be made by the group corporations. This must be done before the examination and approval of the plan by the shareholders' general meeting.

The share option reports submitted by the state-owned major shareholders must include the following contents:

  • A brief introduction on the listed company.

  • The items to be discussed by the shareholders' general meeting.

  • Explanations of the information provided.

  • Explanations of the performance assessment systems, development strategies and implementation plans of the listed company.

 
32. Are there any data protection requirements or obligations for an offer of shares under, and participation in, an employee share plan?

There are no general legal data protection requirements or obligations concerning participation in an employee share plan.

China does not have any special regulation on this matter. To protect employees' information, it is advisable for the employer to obtain the written consent of an employee before sending their information to an overseas parent company or plan administrator.

 

Formalities

33. What are the applicable legal formalities?

Translation requirements

There is no legal requirement to translate equity incentive schemes into the local language. However, it is customary to translate the schemes into English or Chinese for ease of understanding by the members of the share plan.

E-mail or online agreements

Employees can enter into binding agreements under share plans electronically. This is regulated and protected by law.

Witnesses/notarisation requirements

There are no witnesses or notarisation requirements.

Employee consent

The employer must obtain the employee's consent for all actions relating to the administration of the employee's options or other awards.

 

Developments and reform

34. Are there any current trends, developments and reform proposals that have or will affect the operation of employee share plans?

Trends and developments

Most of the listed companies that have launched equity incentive plans are not state-owned companies. A significant proportion of the listed companies with equity incentive plans are hi-tech companies. Most equity incentive plans launched are share option plans, and the rest are largely restricted share plans.

In 2010, for the first time, an equity incentive plan targeting mid-level managers and professionals (rather than directors and senior managers) was launched. Equity incentive schemes in China are still in their early stages of development.

Reform proposals

On 18 August 2016, the State-owned Assets Supervision and Administration Commission, the Ministry of Finance and the China Securities Regulatory Commission jointly issued the Opinions on the Development of Pilot Employee Stock Ownership of State-Controlled and Mixed Ownership Enterprises.

These opinions introduce a small-scale pilot employee stock ownership programme for certain qualified state-owned enterprises (SOEs). Its purpose is to align the interests of SOEs with those of their employees. Measures that protect state-owned assets are also part of the programme, such as:

  • Restrictions on eligibility for participation.

  • 36 months' lock-up period.

  • Limits on the ratio of employee shareholding.

The implementation of the programme will start in late 2016, and will be evaluated at the end of 2018 for possible expansion.

 

Online resources

Central People's Government of the People's Republic of China

W www.gov.cn

Description. This is an official website maintained by the Central People's Government of China and provides access to most rules and regulations issued by the department. The information is up to date. Below are some specific links to laws and regulations referred to in the article:

Central People's Government of the People's Republic of China (English)

W http://english.gov.cn/ ( www.practicallaw.com/9-521-7943)

Description. This is an official website maintained by the Central People’s Government of China. Some of the rules and regulations issued by the department are translated on the site into English. The information is up to date.

Ministry of Commerce of the People's Republic of China

W www.mofcom.gov.cn

Description. This is an official website maintained by the Ministry of Commerce of China. The information on the site is up to date. Nearly all the new policies and regulations regarding investment are published on this website.

Invest in China (English)

W www.fdi.gov.cn/1800000121_10000041_8.html

Description. This is an official website managed by the Ministry of Commerce of China. It helps foreign nationals that invest in China. The information on the site is up to date.



Contributor profiles

Junlu Jiang, Partner, Head of Labour and Employment practice groups

King & Wood Mallesons

T +86 10 5878 5055
F +86 10 5878 5577
E jiangjunlu@cn.kwm.com
W www.kwm.com

Professional qualifications. China, 1994

Areas of practice. Labour and employment law; labour dispute arbitration and litigation; social security; real estate.

Recent transactions

  • Represented a multinational pharmaceutical client in litigation involving employees' request to acquire shares of the company after leaving the company under the share plan.
  • Advised a Fortune 500 company on structuring the employee share plan of the company and reviewing relevant agreements.

Languages. Mandarin, English

Xiaodan Xu, Partner

King & Wood Mallesons

T +86 10 5878 5028
F +86 10 5878 5577
E xuxiaodan@cn.kwm.com
W www.kwm.com

Professional qualifications. China, 2002

Areas of practice. Labour and employment law; arbitration and litigation; dispute resolution.

Recent transactions

  • Designed and reviewed the share option plan of a listed company.
  • Dealt with the issues and resolved the disputes related to the exercise of share options and compensation of share option benefits arising from the merger and acquisition of a multinational company.

Languages. Mandarin, English


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