With the heating up of the New Third Board, more unlisted companies have been strengthening cohesiveness and competitiveness through the equity incentive of employee shareholding – mainly in the form of direct shareholding by employees, indirect shareholding through a company, or indirect shareholding through a partnership. Tax costs and capital operation concerns have led nearly 60% of companies to opt for a limited partnership shareholding platform.
Q: What are the advantages of having a limited partnership serving as the shareholding platform? A: A limited partnership platform is more flexible. The incentive recipients are able to realize the equity incentive by becoming limited partners, realize share buyback and cancellation by transferring their units to the general partner, and realize a reduction in their shareholdings by applying to the partnership to sell the shares corresponding to their units. As the general partner handles partnership matters, undertakes the management functions and serves as the representative of the limited partnership in dealings with third parties, the candidate for such a role is usually the controlling shareholder of the company listed on the New Third Board and the employees benefiting from the incentive serving as limited partners. The partnership agreement can specify when a limited partner can be compelled to withdraw from the partnership and bestow upon the matter handling partner the right to remove an incentive recipient who fails to comply with the partnership withdrawal provisions, thereby realizing the forced withdrawal of the incentive recipient.
Q: When should a company establish the shareholding platform, and how can it control the timing? A: According to the Answers to Questions on the Oversight of Unlisted Public Companies: Private Placements (2), companies with legal personality, partnerships and other such shareholding platforms that are established for the purpose of ensuring the clarity of equity, guarding against financing risks and solely for subscribing for shares, and that do not actually operate any business, do not satisfy administrative requirements for investor suitability and may not participate in the share offerings of unlisted public companies. Where an employee shareholding plan established by a company listed on National Equities Exchange and Quotations subscribes for a private equity fund, asset management plan or other such financial product subject to the oversight of the China Securities Regulatory Commission (CSRC), and has completed approval and recordal procedures and fully disclosed information, it may participate in private placements of unlisted public companies.
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Zheng Xilin is a partner and Wu Di is an associate with AnJie Law Firm
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