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PRC Labour Law - Bitesize

18 September 2013
Mayer Brown JSM Newsletter

Stock Option

Can a foreign company offer share options for its shares to a PRC employee employed by its related PRC incorporated company?

Yes, this arrangement for a stock option scheme is generally acceptable if the foreign company is listed. In practice, the relevant PRC individual must apply for registration with the local subsidiary authority of China's State Administration of Foreign Exchange (SAFE) and obtain the relevant certificate of approval, before opening a specific bank account. The employee will also be required to comply with the relevant filing process required by the PRC tax authority.

What application process must be followed?

The rules for the application process are set out in the SAFE Circular on Relevant Issues Concerning Foreign Exchange Control of the Participation in Equity Incentive Schemes of Overseas Listed Companies by Domestic Individuals issued on 15 February 2012 (Circular 7).

Circular 7 requires that:

  1. An individual participating in the equity incentive plan of an offshore listed company is required to carry out, on a collective basis and through a filing agent appointed by his or her "domestic company" (including a representative office, or partnership), a foreign exchange registration for such participation;
  2. The "domestic individual" eligible for filing the SAFE registration may include "directors, supervisors, senior officers or other employees" of a "domestic company", and those having an engagement relationship with the company through the independent contract for service (e.g., retired persons, and consultants). In addition, expatriates (inclusive of Hong Kong, Macau and Taiwan residents) who have resided in China for "one year continuously" may be included;
  3. An "equity incentive plan" is a plan adopted by an offshore listed company to use its shares as objects to provide an equity-based incentive to individuals who have an employment or labour service providing relationship with a "domestic company". In addition to stock option plans, other incentive plans such as stock appreciation rights, performance shares, phantom shares and restricted shares must apply for the SAFE registration;
  4. A certificate of foreign exchange registration for the "equity incentive plan" is required when a domestic agent (normally a subsidiary of the company listed abroad) applies for a payment quota or opens a domestic special foreign exchange account. Also, the domestic agent is required to provide quarterly reports on the status of the equity plan.
  5. To the extent that an Incentive Plan expires or terminates, the domestic agent is required to carry out a registration cancellation procedure within 20 working days thereafter.

Notwithstanding the above, since there are still some details which have not been addressed or clarified in Circular 7, the application process may be subject to different practices when the relevant registration is filed with the local SAFE authority.

What filing process must be followed?

The PRC entity (or the entrusted agency) is required to file the proposed share options scheme or plan, stock option agreements, and other related documents with the local tax bureau before it is implemented.

In addition, before the employees exercise their rights under the scheme, the PRC entity (or the entrusted agency) is also required to file the exercise notice, adjustment notice in respect of exercising rights, and other related documents with the local tax bureau.

What are some other issues associated with the implementation of a share options scheme in China?

In general, PRC employment law may not apply to the enforcement of the stock option scheme. This is because it is the foreign company, rather than the PRC subsidiary, which awards the stock option to the relevant individuals. Legally speaking, it is the PRC subsidiary (rather than the foreign company) which is acting as the employer of the relevant PRC employees. Therefore, whether and how the employee's employment with the PRC subsidiary will impact his or her participation in the stock option plan can be provided by agreement.

Having said that, according to Circular 7, one of the supporting documents required by the SAFE authority for the application of registration is the undertaking letter issued by the PRC subsidiary stating that the employment or engagement relationship between the PRC individuals and the PRC subsidiary is genuine and valid.

Therefore, you should ensure there is documentation to demonstrate the existence of the employment or engagement relationship between the PRC subsidiary and the relevant PRC individuals when making the relevant application.

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