Viewpoint... The depth of employee shareholding and equity incentive under the background of the mixed reform of state-owned enterprises.

The mixed ownership reform of state-owned enterprises is a series of dynamic processes for state-owned enterprises to improve the corporate governance system, enhance market competitiveness, and promote the preservation and appreciation of state-owned assets. One of the important means has received more and more attention from enterprises in the process of mixed reform of state-owned enterprises, but in practice, equity incentives and employee stock ownership are often confused, and there are many inconveniences. The author believes that under the background of the mixed reform of state-owned enterprises, employee equity incentive and employee shareholding have a dialectical relationship between mode and result, holding and incentive, and the two contain each other and have their own emphasis, therefore, sorting out the two concepts clearly will be conducive to improving the standardization and effectiveness of the mixed reform governance and management level of state-owned enterprises.

This paper would like to state-controlled listed companies as a sample for discrimination, the reason is that state-controlled listed companies due to the particularity of the nature of the enterprise, in the supervision of the CSRC for the capital market, but also subject to the supervision of the SASAC, in order to avoid the loss of state-owned assets, employee shareholding in the implementation of the path level there are more stringent constraints. (For non-listed state-owned enterprises, the application may be relaxed after excluding the restrictions set by the CSRC.)

1. Policy basis

Equity Incentives:

State-controlled listed companies implement equity incentive plans, except in accordance with the "Administrative Measures for Equity Incentives for Listed Companies" promulgated by the China Securities Regulatory Commission in 2016 (the trial measures were introduced in 2005 and revised in 2018 to encourage eligible foreign employees to participate in equity incentives), it is also in line with the "Trial Measures for the Implementation of Equity Incentives by State-controlled Listed Companies (domestic)" and the "Notice on Regulating the Implementation of Equity Incentive System by State-controlled Listed Companies" promulgated by the State-owned Assets Supervision and Administration Commission and the Ministry of Finance in September 2006 and October 2008 respectively.

Employee Stock Ownership:

State-controlled listed companies carry out employee stock ownership plans in accordance with the "Guiding Opinions on the Pilot Implementation of Employee Stock Ownership Plans for Listed Companies" issued by the China Securities Regulatory Commission in June 2014, and then jointly issued by the State-owned Assets Supervision and Administration Commission, the Ministry of Finance, and the China Securities Regulatory Commission in August 2016. The "Opinions on the Pilot Implementation of Employee Stock Ownership in State-controlled Mixed Ownership Enterprises" (Guo Zifa Reform [2016] No. 133), the employee share price, shareholding ratio, employee transfer of shares and information disclosure of state-controlled listed companies are still determined in accordance with the aforementioned regulations of the China Securities Regulatory Commission. In terms of the scope of employees, lock-in period, and approval procedures, the ''Employee Stock Ownership Pilot Opinions'' The state-controlled listed companies have made stricter regulations than ordinary listed companies.

2. Subject conditions

Compared with the equity incentive plan, the employee stock ownership plan of state-controlled listed companies has more substantive and clear requirements for the industry sector, equity structure, governance structure, operating income and profit sources and the nature of the enterprise.

The requirements of employee stock ownership for the main body of the enterprise include:(1) the main business is in a fully competitive industry and field of commercial enterprises;(2) the equity structure is reasonable, the shares held by non-public capital shareholders should reach a certain proportion, and the board of directors of the company should have directors recommend by non-public capital shareholders;(3) the corporate governance structure is sound, and a market-oriented labor and personnel distribution system and performance evaluation system should be established, form a market-oriented mechanism in which managers can go up and down, employees can enter and exit, and income can increase and decrease;(4) More than 90% of operating income and profits come from the external market of the enterprise group. In addition, priority is given to supporting the transformation of scientific research institutes, high-tech enterprises, and technology service-oriented enterprises (hereinafter collectively referred to as technology-based enterprises) with a relatively high contribution of human capital and technical elements to carry out employee stock ownership pilots. In principle, enterprises at or above the second level (including) of central enterprises, as well as first-level enterprises of all provinces, autonomous regions, municipalities directly under the Central Government, cities under separate state planning and Xinjiang production and Construction Corps, will not carry out pilot projects of employee stock ownership for the time being. Enterprises that violate the relevant provisions of employee stock ownership in state-owned enterprises and fail to complete the rectification as required shall not carry out the pilot project of employee stock ownership. (Policy basis: Opinions on the Pilot Program of Employee Stock Ownership in State-controlled Mixed-ownership Enterprises)

Listed companies implement equity incentive plans, there are positive and negative conditions for the main body of the enterprise. Positive requirements include:(1) the corporate governance structure is standardized, the shareholders' meeting, the board of directors, the management level is well organized, and the responsibilities are clear. External directors (including independent directors, the same below) account for more than half of the board members;(2) The remuneration committee is composed of external directors, and the remuneration committee system is sound, the rules of procedure are perfect, and the operation is standardized;(3) The internal control system and performance appraisal system are sound, The basic management system is standardized, and the labor employment, salary and welfare system and performance appraisal system that meet the requirements of the market economy and modern enterprise system have been established;(4) The development strategy is clear, the asset quality and financial status are good, and the operating performance is stable; there are no financial violations and bad records in the past three years;(5) other conditions stipulated by the securities regulatory authorities. Reverse requirements include:(1) The financial accounting report of the most recent fiscal year was issued by a certified public accountant with a negative opinion or an audit report unable to express an opinion;(2) The internal control of the financial report of the most recent fiscal year was issued by a certified public accountant with a negative opinion or unable to express an opinion Audit report;(3) There has been a situation of failing to distribute profits in accordance with laws and regulations, articles of association, and public commitments within the last 36 months after listing;(4) Where laws and regulations stipulate that equity incentives shall not be implemented;(5) Other circumstances determined by the CSRC. (Policy basis: Measures for the Administration of Equity Incentives for Listed Companies and Trial Measures for the Implementation of Equity Incentives for State-controlled Listed Companies (Domestic))

3. Motivation mode

The employee stock ownership plan is mainly required to be carried out in the form of capital increase and share expansion and capital contribution, while the equity incentive plan can be carried out in the form of stock options, restricted stocks and other ways permitted by laws and administrative regulations. (Policy basis: "Opinions on the Pilot Program of Employee Stock Ownership in State-controlled Mixed-ownership Enterprises" and "Trial Measures for the Implementation of Equity Incentives in State-controlled Listed Companies (Domestic)")

4. Object Scope

The scope of the employee stock ownership plan is the company's employees (including management personnel). The specific requirements include:(1) The personnel involved in the shareholding should be scientific research who work in key positions and have a direct or greater impact on the company's business performance and sustainable development. Personnel, management personnel and business backbones, and signed a labor contract with the company. (2) The leaders of state-owned enterprises appointed by the Party Central Committee, the State Council and local Party committees, governments and their departments and institutions shall not hold shares. (3) Outside directors and supervisors (including employee representative supervisors) do not participate in employee shareholding. If more than one immediate family member is in the same enterprise, only one person can hold shares. (Policy basis: "Guiding Opinions on the Pilot Implementation of Employee Stock Ownership Plans by Listed Companies", "Opinions on the Pilot Implementation of Employee Stock Ownership by State-controlled Mixed Ownership Enterprises")

In principle, the scope of equity incentives is limited to directors and senior managers of listed companies, as well as core technical personnel and management backbones who have a direct impact on the overall performance and sustainable development of listed companies. Supervisors, independent directors and external directors held by personnel other than the holding company of listed companies will not be included in the equity incentive plan for the time being, and those who are not allowed to be incentive objects as stipulated by the securities regulatory authorities shall not participate in the equity incentive plan. In addition, the focus of equity incentives for listed companies should be senior managers and core technical backbones who have a direct impact on the company's operating performance and future development, and the scope must not be expanded at will. Persons who do not work in a listed company and do not belong to the listed company (including employees of the controlling shareholder company) shall not participate in the equity incentive plan of the listed company. The supervisors of domestic and overseas listed companies shall not be the object of equity incentive. (Policy basis: "Trial Measures for the Implementation of Equity Incentives by State-controlled Listed Companies (Domestic)" "Notice on Regulating Issues Concerning the Implementation of Equity Incentive System by State-controlled Listed Companies")

5. Number of incentive shares

The total number of shares held by all valid employee stock ownership plans of listed companies shall not exceed 10% of the total share capital of the company, and the total number of shares corresponding to the shares acquired by a single employee shall not exceed 1% of the total share capital of the company. The total number of shares held by the employee stock ownership plan does not include shares acquired by employees prior to the listing of the company's initial public offering, shares purchased through the secondary market and shares acquired through equity incentives. (Policy basis: "Guiding Opinions on the Pilot Implementation of Employee Stock Ownership Plans by Listed Companies" (CSRC Announcement (2014) No. 33))

During the validity period of the equity incentive of a listed company, the total amount of equity granted shall be reasonably determined between 0.1 and 10% in combination with the size of the equity of the listed company, the scope of the equity incentive object, the level of equity incentive and other factors. In principle, the amount of equity granted for the first implementation of the equity incentive plan shall be controlled within 1% of the total equity of the listed company. Unless approved by a special resolution of the general meeting of shareholders, the shares of the company granted by any incentive object through all the equity incentive plans within the validity period shall not exceed 1% of the total share capital of the company, and the reserved proportion shall not exceed 20% of the number of interests to be granted by the equity incentive plan. (Policy basis: "Trial Measures for the Implementation of Equity Incentives by State-controlled Listed Companies (Domestic)" "Measures for the Administration of Equity Incentives for Listed Companies")

6. Subscription Price

The subscription price of the employee stock ownership plan of a listed company does not have additional incentive and preferential space, and can only be in accordance with the relevant provisions of the Measures for the Administration of Securities Issuance of Listed Companies on non-public issuance of shares, and shall not be lower than the average price of the company's shares in the 20 trading days prior to the pricing benchmark date 80% of the price. (Policy basis: Guiding Opinions on the Pilot Implementation of Employee Stock Ownership Plans by Listed Companies)

The grant price of the equity incentive of a listed company shall not be lower than the higher of the following prices:(1) the par value of the stock;(2) the closing price of the underlying stock of the company on the trading day before the announcement of the draft summary of the equity incentive plan;(3) the average closing price of the underlying stock of the company within 30 trading days before the announcement of the draft summary of the equity incentive plan. If it is implemented in the form of stock options, the grant price shall not be lower than the higher of the following prices in principle: the average trading price of the company's shares on the first trading day before the announcement of the draft (I) equity incentive plan; one of the average trading prices of the company's shares on 20 trading days, 60 trading days or 120 trading days before the announcement of the draft (II) equity incentive plan. If it is implemented in the form of restricted shares, the grant price shall not be lower than the higher of the following prices in principle: 50% of the average trading price of the company's shares on the trading day before the announcement of the draft (I) equity incentive plan; 50% of the average trading price of the company's shares on 20 trading days, 60 trading days or 120 trading days before the announcement of the draft (II) equity incentive plan. (Policy basis: "Administrative Measures for Equity Incentives of Listed Companies", "Trial Measures for the Implementation of Equity Incentives by State-controlled Listed Companies (Domestic)", "Guidelines for the Implementation of Equity Incentives by State-controlled Listed Companies", "Regarding Issues Related to Regulating the Implementation of the Equity Incentive System by State-controlled Listed Companies" Notice ")

7. Term (holding period, lock-up period, exercise restriction period, sale restriction period, plan validity period)

The shareholding period of each period of the employee stock ownership plan shall not be less than 12 months, and if the employee stock ownership plan is implemented in the form of non-public offering, the shareholding period shall not be less than 36 months, starting from the transfer of the underlying shares announced by the listed company to the name of the current stock ownership plan; the listed company shall announce the number of shares held by the expiration plan six months before the expiration of the employee stock ownership plan. At the same time, employees who have held shares before the company's public offering shall not transfer their shares at the time of the company's initial public offering, and shall undertake a lock-up period of not less than 36 months from the date of listing. (Policy basis: "Guiding Opinions on the Pilot Implementation of Employee Stock Ownership Plans by Listed Companies", "Opinions on the Pilot Implementation of Employee Stock Ownership by State-controlled Mixed Ownership Enterprises")

The validity period of the equity incentive plan shall be calculated from the date of adoption of the general meeting of shareholders and shall generally not exceed 10 years. When the validity period of the equity incentive plan expires, the listed company shall not grant any equity according to this plan. During the validity period of the equity incentive plan, it shall be implemented in stages, and the interval of each equity grant plan shall be more than one complete fiscal year. The restriction period for the exercise of equity incentives in the form of options is the period from the date of grant (authorization date) to the effective date of the equity (feasible date), which in principle shall not be less than 2 years, and may not be exercised during the restriction period; the period of validity of the exercise is the period from the effective date of the equity to the expiration date of the equity, which shall not be less than 3 years. In principle, within the validity period of the exercise, the exercise of the right shall be carried out in batches at a uniform speed. If the validity period of the exercise is exceeded, the power shall automatically expire and shall not be exercised retroactively. During the validity period of the equity incentive in the form of restricted stocks, the lock-up period of the restricted stocks granted in each period shall not be less than 2 years. Upon the expiration of the lock-up period, the number of stocks that can be unlocked (transferred and sold) by the incentive object shall be determined according to the completion of the equity incentive plan and performance objectives. The unlocking period shall not be less than 3 years. In principle, the unlocking method shall be adopted at a constant speed during the unlocking period. (Policy basis: "Trial Measures for the Implementation of Equity Incentives in State-controlled Listed Companies (Domestic)")

8. Circulation of Shares

The underlying stock interest in an employee stock ownership plan may be enjoyed by the employee himself or transferred or inherited. The rights of possession, use, income and disposition of the share rights and interests obtained by employees through the stock ownership plan can be exercised in accordance with the agreement of the employee stock ownership plan; employees participating in the employee stock ownership plan resign, retire, die, and are no longer suitable to participate in the stock ownership plan. In the event of reasons, the equity held by the employee shall be disposed of in accordance with the agreed method of the employee stock ownership plan. (Policy basis: Guiding Opinions on the Pilot Implementation of Employee Stock Ownership Plans by Listed Companies)

The equity incentive plan shall provide for the acceleration and termination of the exercise of rights in accordance with the law with regard to the change, merger and separation of the company's control, as well as the handling of equity in the event of the resignation, transfer, dismissal, retirement, death and loss of civil capacity of the incentive object. When the equity incentive object is normally transferred, retired, died or lost the capacity for civil conduct, if the granted equity has reached the exercisable time limit and performance appraisal conditions in the current year, the exercisable part can be exercised within half a year from the date of resignation, and the exercisable time limit and performance appraisal conditions have not been reached. When the equity incentive object resigns or is dismissed, the equity that has not yet been exercised shall no longer be exercised. (Policy basis: "Trial Measures for the Implementation of Equity Incentives by State-controlled Listed Companies (Domestic)" "Notice on Issues Concerning Regulating the Implementation of Equity Incentive System by State-controlled Listed Companies")

9. Performance appraisal

The employee stock ownership plan is relatively broad for performance evaluation, which only requires the company to establish a market-oriented labor and personnel distribution system and performance evaluation system, so as to form a market-oriented mechanism in which managers can go up and down, employees can enter and exit, and income can increase and decrease. (Policy basis: Opinions on the Pilot Program of Employee Stock Ownership in State-controlled Mixed-ownership Enterprises)

The requirements of equity incentive for performance evaluation are relatively clear, mainly including:(1) establish a sound performance evaluation system and evaluation methods. Performance evaluation indicators should include comprehensive indicators reflecting shareholder returns and company value creation, such as return on equity (ROE), economic value added (EVA), earnings per share, etc.; Reflect the company's profitability and market value and other growth indicators, such as net profit growth rate, main business income growth rate, the company's total market value growth rate, etc.; indicators reflecting the quality of corporate earnings, such as the proportion of main business profits to total profits, cash operating index, etc. In principle, at least one of the above three types of performance appraisal indicators shall be selected. The calculation of the relevant performance appraisal indicators should be in accordance with the current accounting standards and other relevant requirements. (2) The performance target level of the listed company when granting the equity of the incentive object shall not be lower than the average performance level of the company in the past three years and the average performance level (or the 50th mark value of the benchmark enterprise) of the same industry (or the selected domestic and foreign benchmark enterprises in the same industry, determined by the industry classification standard of the securities regulatory department, the same below). (3) The performance target level of the incentive object of the listed company when exercising the right shall be improved on the basis of the performance level at the time of award, taking into account the characteristics of the industry in which the listed company is located and its own strategic development positioning, and shall not be lower than the average performance level of the company in the same industry (or the 75th mark value of the target enterprise). Anything below the average performance of the same industry (or the 75-point value of the benchmark enterprise) may not be exercised. (Policy basis: Notice on Issues Concerning Regulating the Implementation of the Equity Incentive System by State-controlled Listed Companies)

10. Stock Source

The sources of shares held by employees are:(1) repurchase of the Company's shares by listed companies;(2) secondary market purchases;(3) subscription of non-public offerings;(4) voluntary gifts by shareholders; and (5) other means permitted by laws and administrative regulations. (Policy basis: Guiding Opinions on the Pilot Implementation of Employee Stock Ownership Plans by Listed Companies (CSRC Announcement (2014) No. 33)

The source of the shares of the equity incentive shall be determined in accordance with the actual situation of the Company, through the issuance of shares to the incentive target, the repurchase of the Company's shares and other means permitted by laws and administrative regulations, and shall not be paid by a single state-owned shareholder or quantified without compensation. (Policy basis: "Trial Measures for the Implementation of Equity Incentives in State-controlled Listed Companies (Domestic)")

11. SOURCES OF FUNDS

The employee stock ownership plan is funded by the employee's legal compensation and other methods permitted by laws and administrative regulations. Pilot enterprises and state-owned shareholders shall not give shares to employees free of charge, and shall not provide financial assistance such as advances, guarantees and loans to employees holding shares. Shareholding employees shall not accept loans or financing assistance from other enterprises that have production and operation business dealings with the pilot enterprise. (Policy basis: "Guiding Opinions on the Pilot Implementation of Employee Stock Ownership Plans by Listed Companies" (CSRC Announcement (2014) No. 33))

When a state-controlled listed company implements equity incentives, the listed company shall not provide loans and any other form of financial assistance, including providing guarantees for its loans, for the incentive object to obtain relevant rights and interests in accordance with the equity incentive plan. (Policy basis: "Trial Measures for the Implementation of Equity Incentives in State-controlled Listed Companies (Domestic)")

12. Method of voting at the general meeting of shareholders

If the employee stock ownership plan involves relevant directors and shareholders, the relevant directors and shareholders shall abstain from voting; if the company's general meeting of shareholders makes a resolution on the employee stock ownership plan, it shall be approved by more than half of the voting rights held by the shareholders present at the meeting. (Policy basis: "Guiding Opinions on the Pilot Implementation of Employee Stock Ownership Plans by Listed Companies" (CSRC Announcement (2014) No. 33))

The implementation of an equity incentive plan by a listed company must be approved by more than 2/3 of the voting rights held by shareholders attending the general meeting of shareholders. Shareholders who intend to be the incentive object or shareholders who are related to the incentive object shall avoid voting. (Policy basis: Measures for the Administration of Equity Incentives for Listed Companies)

13. APPROVAL PROCEDURE

The pilot enterprise shall fully listen to the opinions of the employees of the enterprise on the employee stock ownership plan through the employee representative assembly and other forms, and the board of directors shall submit it to the shareholders (general) meeting for deliberation. After the employee stock ownership plan of the local pilot enterprise has been reviewed and approved by the shareholders (large) meeting, it shall be reported to the institution that performs the responsibilities of the investor for the record, and at the same time a copy shall be submitted to the state-owned assets supervision and administration agency of the provincial people's government; the employee stock ownership plan of the central pilot enterprise shall be approved by the shareholders (large) meeting, and shall be reported to the institution that performs the investor's duties for the record. (Policy basis: "Guiding Opinions on the Pilot Implementation of Employee Stock Ownership Plans by Listed Companies" (CSRC Announcement (2014) No. 33))

The equity incentive plan of a listed company shall be reviewed and approved by the institution or department performing the duties of the investor of state-owned assets, and then reported to the China Securities Regulatory Commission for the record and handle information disclosure, registration and settlement in relevant institutions. (Policy basis: "Trial Measures for the Implementation of Equity Incentives in State-controlled Listed Companies (Domestic)")

14. Agencies

A listed company may manage its own employee stock ownership plan, or it may appoint an independent third-party organization to entrust the management of the employee stock ownership plan to a qualified asset management institution. Employees participating in the employee stock ownership plan shall elect representatives or set up corresponding institutions through the employee stock ownership plan holders' meeting to supervise the daily management of the employee stock ownership plan, exercise shareholder rights on behalf of the employee stock ownership plan holders or authorize the asset management institution to exercise shareholder rights. (Policy basis: Guiding Opinions on the Pilot Implementation of Employee Stock Ownership Plans by Listed Companies (CSRC Announcement (2014) No. 33)

The Measures for the Administration of Equity Incentives for Listed Companies does not make special provisions on the management agency. The incentive objects directly hold stocks or options and manage themselves; at the same time, the general meeting of shareholders is responsible for reviewing and approving the implementation, modification and termination of the plan, and the board of directors is the executive management of the plan. The remuneration and assessment committee under the board of directors is responsible for drafting and revising the plan and reporting it to the board of directors for deliberation.