To motivate its officers and key employees, retain talents and enhance core competencies, a Chinese company that is planning an initial public offering (IPO) as a red-chip company outside China usually develops and implements an employee incentive scheme (EIS) in the process of pre-IPO restructuring to grant a percentage of interest or equity in the company to its employees before the IPO application is submitted. In this article, the authors will explore how this works under the “small red-chip” model (i.e., IPO of Chinese private companies on overseas markets).
Implementation. Under the current red-chip structure, the “equity pool” under an EIS immediately before the IPO, generally consisting of shares in the special purpose vehicle (SPV, or the foreign company that will go public, or potential issuer) as transferred from the controlling shareholder or shares resulting from private offering of the potential issuer, takes forms that particularly include share options, stock appreciation rights and restricted stock units (RSU).
During the process of pre-IPO restructuring, in view of the number of incentive receivers and the minimal percentage that their shareholdings represent, typically the EIS (or stock incentive plan) is placed into a trust to facilitate implementation of the incentive plan as well as subsequent disposal of relevant shares or stakes. The shares transferred from the controlling shareholders or resulting from private offering by the potential issuer are moved into an offshore discretionary trust established for this purpose, under which the shares are held by the trustee, eligible incentive receivers are named as beneficiaries, and the controlling shareholder is designated as trust protector. Typically, the voting rights attached to the shares held in trust are exercised by the controlling shareholder before they are vested.
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Lai Jihong and Chen Jingeng are partners at Zhong Lun Law Firm