China: Regulator Allows Employee Stock Ownership Plans

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By Leslie A. Pappas  

June 27— Companies listed on China's stock exchanges may offer employee stock ownership plans (ESOPs) under new guidance from China's securities regulator, a welcome development for multinationals investing in listed Chinese companies, a practitioner told Bloomberg BNA.

Issued June 20 by the China Securities Regulatory Commission (CSRC), Announcement [2014] No. 33 revises and implements an August 2012 draft regulation that proposed expanding participation in stock ownership plans for all employees.

Principal Effect Domestic

The CSRC guidance, effective immediately, will primarily affect domestic listed companies in China, according to Richard Gu, a senior consultant with Linklaters in Shanghai, who has experience in China-related cross-border mergers and acquisitions and foreign direct investment transactions.

“It doesn't apply to cross-border share schemes,” Gu told Bloomberg BNA in a telephone interview June 25, adding that the CSRC has never issued rules or guidance on global share schemes for employees in China.

CSRC's new rules could nevertheless be attractive to foreign entities that invest in companies listed on the Shanghai or Shenzhen stock exchanges, because they give foreign investors a new way to structure incentive schemes for China-based employees, Gu said.

“Instead of using international shares, they can actually use the shares listed in China,” Gu said, which would avoid exchange rate controls and other potential regulatory hurdles raised by cross-border share plans.

According to the guidance, the pilot will be carried out on a voluntary basis. Companies wishing to create an ESOP do not need to obtain pre-approval from the CSRC but must disclose information to the market about implementation of the plan. The only exception would be the issuance of new shares, in which case CSRC approval would be required.

Clarification of Earlier Draft

Overall, the guidance issued June 20 brings China in line with global standards for ESOPs, Gu said.

Announcement No. 33 differs in several respects from the 2012 draft regulation. The new guidance clarifies the source of the shares, for example, specifying that a company may purchase shares from the market, arrange for an employee to subscribe to company-issued shares, or arrange for a shareholder to donate the shares to the employee.

“That wasn't very clear in the draft,” Gu said, which only specified that shares should be acquired from the market.

The guidance also differs from the draft in respect to management of the ESOP. Under the draft rules, the CSRC would have required companies to entrust management of the plan to a third party, such as a trust or insurance asset management company. The new guidance allows the company to manage the plan on its own.

“That's also in line with global practice,” said Gu.

Limits on Stock Ownership

The guidance stipulates that the total amount of stock owned under all ESOPs be no more than 10 percent of a company's share capital and that individuals own no more than 1 percent of a company's total shares through their participation in ESOPs. These restrictions do not apply to shares purchased from the market, Gu added.

A large number of employees at China's A-share companies already own company stock, according to data from the CSRC. At the end of 2012, 74 percent of listed companies had employees who owned stock of their own firms.

The regulation takes effect immediately but is unlikely to be widely applied until beneficial tax policies are formulated, according to state news agency Xinhua.

According to CSRC spokesperson Zhang Xiaojun as reported by Xinhua, the commission is working with relevant government departments on tax policies for ESOPs.

To contact the reporter on this story: Leslie A. Pappas in Beijing at

To contact the editor responsible for this story: Rick Vollmar at

CSRC Announcement [2014] No. 33, issued June 20, 2014, is available in Chinese at .

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