On 25 February, the State Administration of Foreign Exchange (SAFE) published the Notice on the Issue Regarding Foreign Exchange Control for Individuals Inside China Who Participate in Equity Incentive Plans of Overseas Listed Companies (document 7). At the same time, SAFE also repealed the Participation by Individuals Inside China in Foreign Exchange Control Operating Procedures such as Employee Stock Ownership Plans and Share Option Schemes of Overseas Listed Companies (document 78), which came into effect from 2007. Compared with document 78, document 7 contains more detailed provisions and updates in the following areas.
Scope of application
In document 7, “overseas listed companies” are expanded to be defined as “companies listed on the stock exchanges outside China (including Hong Kong, Macau and Taiwan)”. An unnecessary description in document 78 – “companies shall include Chinese-funded and non-Chinese-funded holding companies” – was deleted. According to the above definition, the equity incentive plans of offshore non-listed companies are not subject to filing or registration for the purpose of foreign exchange control, as mentioned in document 7.
In document 78, “domestic companies inside China” were defined only as PRC companies listed in overseas stock exchanges, or the parent companies, subsidiaries and branches in China of overseas listed companies. Document 7 has expanded the definition of “domestic companies inside China” to cover not only the permanent representative offices in China of overseas listed companies, and also the “companies and partnerships at all levels in China which have a controlling relationship or a de facto control relationship with overseas listed companies”. This has provided a legal basis for Chinese employees of overseas listed companies to participate in equity incentive plans to a greater extent.
Pursuant to document 7, individuals inside China who are eligible to participate in equity incentive plans of overseas listed companies are those Chinese citizens who have employment or labour relations with domestic companies in China, as well as those individuals from Hong Kong, Macau and Taiwan, and expatriates who have resided continuously for a year in China.
But are expatriates sent by overseas affiliated companies to work for domestic companies in China considered as individuals “who have employment or labour relations with domestic companies in China”? These expatriates work for domestic companies in China based on a dispatch agreement or other similar agreements. They can participate in equity incentive plans through foreign companies that have a direct employment relationship with them.
Generally, they are not required to do so in accordance with document 7, or to register their relevant equity incentive plans with SAFE.
Equity incentive plans
Document 78 explicitly provided for two types of equity incentive plan that overseas listed companies could offer – an employee stock ownership plan and an employee share option scheme – while document 7 classifies equity incentive plans as “[an] employee stock ownership plan, share option scheme or other equity incentive methods as permitted by laws and regulations”.
In SAFE’s “Foreign Exchange Registration Form for Domestic Individuals to Participate in the Equity Incentive Plans of an Overseas Listed Company”, the equity incentive plans are broken down into eight categories covering employee stock ownership plans, share options, stock appreciation rights, restricted stock (units), performance-based shares (units), virtual stock, employee stock purchase plans and others.
However, only the definitions of share options, stock appreciation rights and restricted stock (units) are contained in other relevant laws and regulations, as well as the rules and notices of government departments. If the shares of an overseas listed company are the subject matter under an equity incentive plan and such a plan cannot be classified into any one of the first seven categories, then this plan should be filed for the record in accordance with the requirements of document 7 as a precaution.
SAFE respects the right of a company to determine the type of its own equity incentive plan, and there is no need for the company to provide a full text of the plan for registration and filing with SAFE. If an equity incentive plan is likely to cover a variety of categories, the parties concerned should check the types of plans in the Foreign Exchange Registration Form to reflect their plan’s maximum features.
SAFE has simplified the documents to a large extent in document 7 that need to be submitted along with an application by individuals for foreign exchange registration in order to participate in an equity incentive plan. As a result, a number of documents are no longer required. Only a few application requirements are retained in document 7, like the submission of a written application, supporting documents on an equity incentive plan and a letter of undertaking on employment or labour relations. Previously, the purchase and settlement of foreign exchange in relation to equity incentive plans had to be reported to SAFE, but this is no longer required.
Watch for slight variations
Following the publication of document 7 several months ago, SAFE has imposed some more detailed requirements for the filing and registration of documents prepared for foreign exchange under equity incentive plans, but it’s important to note the practical operations of SAFE branches vary slightly from place to place.
Some branches require that if a domestic individual has joined an equity incentive plan and subsequently leaves the company, his equity interests should be exercised within six months after his departure. The branch of a domestic enterprise is not required to carry out reporting individually as a domestic company; instead, it can do so through its head office on a consolidated basis. A domestic agency can only carry out filing and application with a SAFE branch in the place where the domestic agency is located.
For example, if a domestic agency is a company incorporated in Shanghai, it can only carry out filing with the Shanghai branch for the record.
Kevin Xu is a partner and Sean Liu is an associate at Martin Hu & Partners (MHP Law Firm)
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