New Rules on Employee Share Plans for Foreign Listed Companies in China : Are They Finally Ready to Take Off?

The granting of employee stock options and shares as a form of remuneration is an increasing trend in China considering that retention of talented employees is critical for any corporation to expand in the Chinese market. Foreign listed multinationals have always sought to grant rights to their foreign listed shares as part of their employee share and option plans ("ESPs") in China. The concept of ESPs is not new in China. In 2007, SAFE issued the Circular on the Foreign Exchange Administration of the Participation of Domestic Individuals in Foreign Listed Companies' Employee Share Ownership Plans and Share Option Plans No. 78 ("Circular 78") which took effect on 28 March 2007. However, despite the commercial needs, Circular 78's scope of application was limited and several of the requirements imposed were not easy to satisfy. In addition, there were intensive documentation requirements and uncertainties with the registration process which have until now, limited the rolling out of ESPs in China.

Recent legislative changes in China may, however, change this situation. On 20 February 2012, SAFE issued the Circular on the Foreign Exchange Administration of Domestic Individuals Participating in Foreign Listed Companies' Employee Share Incentive Plans No. 7 ("Circular 7"), which took effect on the same day. Similar to Circular 78, Circular 7 requires SAFE registration to be completed in order to implement an ESP in China and supersedes Circular 78. This note summarizes the requirements under Circular 7 and also raises comparisons with Circular 78 to determine if this recent development will trigger a take off in the use of such plans for employees in China.

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