August 2017
Measures for the Administration of Equity Incentive Plans of Listed Companies(Mainland China)
James Cheng
On July 13, 2016, the China Securities Regulatory Commission promulgated the Measures for the Administration of Equity Incentive Plans of Listed Companies (hereinafter, the "Measures"). The general principle behind the Measures is information disclosure under a climate of relaxed requirements and enhanced supervision so as to lead to an equity incentive regime that is independently decided by the company and is binding and effective to the market. The Measures are highlighted below:
1. Improvement of conditions for implementing equity incentive plans and clearly specify the beneficiaries of such incentive plans. Article 7 of the Measures provides the circumstances under which a listed company may not implement an equity incentive plan: (1) a certified public accountant pronouncing either a negative opinion on no opinion in an audit report regarding the company's financial report of the last fiscal year; (2) a certified public accountant pronouncing either a negative opinion on no opinion in an audit report regarding the internal control portion of the companyÕs financial report of the last fiscal year; (3) the company fails to make a distribution of profits in the last 36 months after it went public pursuant to the law, the articles of incorporation or the company's public commitment; (4) the law prohibits the implementation of an equity incentive plan; and (5) other circumstances stipulated by the China Securities Regulatory Commission. Article 8 of the Measures provides that the beneficiaries of the plan may include the company's directors, high-ranking managerial officers, core technicians or core sales personnel, as well as any other employees that the company believes should be incentivized based on their direct influence on the company's operational performance and future development, provided that this shall not include independent directors and supervisors. Foreign employees who work in China as directors, high-ranking managerial officers, core technicians or core sales personnel of a listed company may receive such incentives. In addition, the Measures also contain specific provisions concerning individuals who are not eligible for incentives and the corresponding circumstances.
2. Improvement of provisions concerning restricted shares and stock options. Both restricted shares and stock options may not be transferred, pledged or used to repay debts before their sale restriction is lifted. The period between the issuance of the restricted shares and the first removal of its sale restriction shall not be less than 12 months, and the period between the grant date of a stock option and its first permitted exercise date shall also be no less than 12 months. In addition, the Measures also contain specific provisions concerning the grant prices, the percentage of restriction removals for restricted shares and exercise installments for options, as well as the handling of failed stock incentive plans with respect to restricted stocks and stock options.
3. Improved implementation procedure for equity incentives. The Measures contain more detailed requirements for the decision-making, grant and implementation of equity incentive plans. There are now clear provisions concerning the duty of the board of directors, the independent directors, the supervisors and the shareholdersÕ meetings with respect to the implementation of equity incentives.
4. Dedicated chapter on information disclosure to enhance supervision in this area. The Measures set down detailed requirements for the timing, the details and the process of information disclosure. Article 54 of the Measures provides for the first announcement of the equity incentive plan, Article 57 spells out the basic elements of the incentive plan to be disclosed, and Article 65 requires the implementation status of the equity incentive plan to be disclosed in periodical reports.
5. Enhanced after-the-fact supervision, more internal accountability mechanism arrangements within a company, and more detailed provisions on supervision and penalties. Articles 66 through 71 of the Measures provide for the legal consequences of a listed company, its independent directors and supervisors, and the securities service institutions and personnel who provided professional opinions on the listed company's equity incentive plan for operating in violation of the relevant regulations.
In consideration that the market would need a transition and grace period after the promulgation of the Measures, once the Measures came into effect on August 13, 2016, the Measures for the Administration of Equity Incentive Plans of Listed Companies (Pilot) and the Nos. 1 through 3 Memoranda on Matters Concerning Equity Incentive Plans and Two Questions and Answers on Supervision became void. Any plan that has been adopted in a shareholders' meeting before the effective date of the Measures shall be implemented pursuant to the original requirements, while new incentive plans and those that have not yet been deliberated in a shareholders' meeting should follow the new requirements.
On July 13, 2016, the China Securities Regulatory Commission promulgated the Measures for the Administration of Equity Incentive Plans of Listed Companies (hereinafter, the "Measures"). The general principle behind the Measures is information disclosure under a climate of relaxed requirements and enhanced supervision so as to lead to an equity incentive regime that is independently decided by the company and is binding and effective to the market. The Measures are highlighted below:
1. Improvement of conditions for implementing equity incentive plans and clearly specify the beneficiaries of such incentive plans. Article 7 of the Measures provides the circumstances under which a listed company may not implement an equity incentive plan: (1) a certified public accountant pronouncing either a negative opinion on no opinion in an audit report regarding the company's financial report of the last fiscal year; (2) a certified public accountant pronouncing either a negative opinion on no opinion in an audit report regarding the internal control portion of the companyÕs financial report of the last fiscal year; (3) the company fails to make a distribution of profits in the last 36 months after it went public pursuant to the law, the articles of incorporation or the company's public commitment; (4) the law prohibits the implementation of an equity incentive plan; and (5) other circumstances stipulated by the China Securities Regulatory Commission. Article 8 of the Measures provides that the beneficiaries of the plan may include the company's directors, high-ranking managerial officers, core technicians or core sales personnel, as well as any other employees that the company believes should be incentivized based on their direct influence on the company's operational performance and future development, provided that this shall not include independent directors and supervisors. Foreign employees who work in China as directors, high-ranking managerial officers, core technicians or core sales personnel of a listed company may receive such incentives. In addition, the Measures also contain specific provisions concerning individuals who are not eligible for incentives and the corresponding circumstances.
2. Improvement of provisions concerning restricted shares and stock options. Both restricted shares and stock options may not be transferred, pledged or used to repay debts before their sale restriction is lifted. The period between the issuance of the restricted shares and the first removal of its sale restriction shall not be less than 12 months, and the period between the grant date of a stock option and its first permitted exercise date shall also be no less than 12 months. In addition, the Measures also contain specific provisions concerning the grant prices, the percentage of restriction removals for restricted shares and exercise installments for options, as well as the handling of failed stock incentive plans with respect to restricted stocks and stock options.
3. Improved implementation procedure for equity incentives. The Measures contain more detailed requirements for the decision-making, grant and implementation of equity incentive plans. There are now clear provisions concerning the duty of the board of directors, the independent directors, the supervisors and the shareholdersÕ meetings with respect to the implementation of equity incentives.
4. Dedicated chapter on information disclosure to enhance supervision in this area. The Measures set down detailed requirements for the timing, the details and the process of information disclosure. Article 54 of the Measures provides for the first announcement of the equity incentive plan, Article 57 spells out the basic elements of the incentive plan to be disclosed, and Article 65 requires the implementation status of the equity incentive plan to be disclosed in periodical reports.
5. Enhanced after-the-fact supervision, more internal accountability mechanism arrangements within a company, and more detailed provisions on supervision and penalties. Articles 66 through 71 of the Measures provide for the legal consequences of a listed company, its independent directors and supervisors, and the securities service institutions and personnel who provided professional opinions on the listed company's equity incentive plan for operating in violation of the relevant regulations.
In consideration that the market would need a transition and grace period after the promulgation of the Measures, once the Measures came into effect on August 13, 2016, the Measures for the Administration of Equity Incentive Plans of Listed Companies (Pilot) and the Nos. 1 through 3 Memoranda on Matters Concerning Equity Incentive Plans and Two Questions and Answers on Supervision became void. Any plan that has been adopted in a shareholders' meeting before the effective date of the Measures shall be implemented pursuant to the original requirements, while new incentive plans and those that have not yet been deliberated in a shareholders' meeting should follow the new requirements.
