Legal Analysis on the Implementation of Employee Stock Ownership Plan in State-owned Enterprises -- Taking the New Third Board Listed Enterprises as an Example

Content Summary: The pilot work of the employee stock ownership plan of state-owned enterprises is in full swing across the country. The author's consulting unit is honored to be one of the first batch of five pilot units in Shandong Province. However, in the process of the formulation and subsequent implementation of the employee stock ownership plan, the author believes that there are many inconsistencies between the current state-owned assets supervision regulations and the business rules of the new third board market. In the face of the necessity of the implementation of the mixed ownership reform of state-owned enterprises and the implementation of the employee stock ownership plan The obstacles and difficulties encountered, the author discusses the problems faced in practice from two aspects: the formulation of laws and regulations.

Keywords: New three-board listed state-owned enterprises employee shareholding plan targeted issuance.
 

Since the Third Plenary Session of the Eighteenth Central Committee of the Communist Party of China, the Party Central Committee and the State Council have made important arrangements for the reform of mixed ownership. In August 2016, with the State-owned Assets Supervision and Administration Commission of the State Council issued the "Opinions on the Pilot Program of Employee Stock Ownership in State-controlled Mixed Ownership Enterprises" (hereinafter referred to as the "Pilot Opinions"), the mixed ownership reform of state-owned enterprises was once again put on the agenda. Widely concerned. It is undeniable that the mixed ownership reform of state-owned enterprises, especially the implementation of the employee stock ownership plan, is undoubtedly a tonic for the accelerated development of state-owned enterprises, and has a positive impact of "affecting the whole body". It plays a positive guiding role in preventing the loss of state-owned assets and preventing the transfer of illegitimate interests. The promulgation of the "Pilot Opinions" can be described as a top-level design specifically for the employee stock ownership plan of state-owned enterprises. Through the employee stock ownership plan, relevant incentive items and constraints can be formulated, which can effectively stimulate the enthusiasm of employees, continuously improve themselves, and create more for the company At the same time, it can solve the problem of brain drain. [1] for the emerging new third board market, equity incentive is also in the water testing stage. Compared with the 11343 listed companies on the new third board, the listed companies that disclose the equity incentive scheme are simply "nine Niu Yimao", while less than 10 state-owned enterprises on the new third board market have issued employee stock ownership plans. [2]]

In the face of state-owned enterprise employee stock ownership plan in the nationwide pilot work, as the new three board listed companies of state-owned enterprises will face what kind of challenges and confusion, and how to use the mixed ownership reform to further enhance the capital market financing capacity, adaptability.

Comparative Analysis of 1. State-owned Enterprise Employee Stock Ownership Plan Regulations and New Third Board Business Rules

Since 2016, the state has successively issued a series of measures and opinions on the supervision and management of state-owned assets, the reform of mixed ownership of state-owned enterprises, especially employee stock ownership. Shandong Province has also issued the ''Shandong Provincial State-owned Enterprise Employees According to the actual situation of state-owned enterprises in the province Implementation Rules for the Pilot Work of Stock Ownership (hereinafter referred to as the "Implementation Rules"). As an enterprise that is both a state-owned enterprise and a listed company on the New Third Board, it must meet the regulatory requirements of the SASAC and must abide by the rules of the New Third Board market in the application of the law. However, in practice, there are many differences and even contradictions between the regulations of the State-owned assets and the rules of the New Third Board market, which are summarized as follows:

(I) have different requirements for shareholding platforms.

Article 3, paragraph 6, of the Pilot Opinions clearly stipulates that "shareholding platforms shall not engage in any business activities other than shareholding". According to the relevant provisions of the "Measures for the Supervision and Administration of Unlisted Public Companies" (hereinafter referred to as the "Supervision and Administration Measures"), in order to ensure clear equity and prevent financing risks, corporate legal persons, partnerships, etc. are established solely for the purpose of subscribing for shares. If the shareholding platform does not have actual business operations, it does not meet the investor suitability management requirements and shall not participate in the share issuance of unlisted public companies. The conflict of the above-mentioned departmental regulations shows that, as a state-owned enterprise listed on the New Third Board, it is no longer possible to participate in the company's private placement through the newly established employee stock ownership platform, which undoubtedly greatly reduces the scope of state-owned enterprises' choice of shareholding methods to a certain extent., Reduced flexibility. And because private equity funds have clear requirements for qualified investors, the "Supervision and Management Measures" have upper limit requirements for the number of people participating in private placement, which leads to the new third board listed state-owned enterprises in the employee equity incentive plan in the choice of shareholding mode is very limited.

(II) have different requirements for the object of shareholding.

The first paragraph of Article 3 of the "Pilot Opinions" stipulates that "the personnel involved in shareholding shall be scientific research personnel, business management personnel and business backbones who work in key positions and have a direct or greater impact on the company's business performance and sustainable development. The company has signed a labor contract. 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. 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." However, Article 39 of the administrative measures stipulates that the specific objects participating in the private placement can have supervisors, and does not exclude external directors. In other words, the new three-board listed state-owned enterprises to implement equity incentives, supervisors, outside directors are not able to participate in the employee shareholding plan.

(III) have different requirements for the number of shares held.

Article 3, paragraph 4, of the "Pilot Opinions" requires that "the total amount of employee shareholding shall not be higher than 30% of the company's total share capital in principle, and the shareholding ratio of a single employee shall not be higher than 1% of the company's total share capital in principle", That is, the "Pilot Opinions" have clear requirements for employee shareholding in terms of shareholding ratio. Article 39 of the Administrative Measures stipulates that listed companies may issue shares to specific targets. For specific targets, the company's directors, supervisors, senior managers, core employees, and qualified investors who meet the investor suitability management regulations, The total number shall not exceed 35. The state-owned management regulations and the new three-board business rules have made different restrictions on the proportion of shares and the number of shares held.

(IV) restrictions on equity transfers differ

The third paragraph of Article 4 of the "pilot opinions" clearly stipulates that "the implementation of employee stock ownership shall set a lock-up period of not less than 36 months... if the shareholding employee leaves the company due to resignation, transfer, retirement, death or dismissal, the shares held shall be transferred internally within 12 months". However, the new third board market does not have a restrictive agreement on the transfer of employee stock ownership after the company is listed, but gives the company more autonomy, which can be agreed through agreement or articles of association.

Analysis of the Necessity of Implementing Employee Stock Ownership Plan in State-owned Enterprises Listed on the New Third Board in 2.

(I) has a positive impact on deepening the reform of state-owned enterprises and developing mixed ownership economy.

The implementation of employee stock ownership plan in state-owned enterprises listed on the New Third Board is an important manifestation of the deepening reform of state-owned enterprises. It is of great significance for optimizing the company's capital structure and improving corporate governance. It represents that the employee stock ownership plan of state-owned enterprises has entered the initial stage of practice.

(II) is conducive to optimizing the company's resource allocation and attracting talent

The innovation and development of state-owned enterprises is not moving, the brain drain phenomenon has been the focus of the problem to be solved. Excellent staff, high-quality scientific research personnel, management personnel and business backbone is the foundation of enterprise development. In today's knowledge age, talent factors occupy an increasingly important position in the development of enterprises. The implementation of employee stock ownership plan in state-owned enterprises listed on the new third board is conducive to enterprises to retain core talents who contribute greatly to the development of enterprises, and the sense of identity and belonging of talents is very important for the long-term development of enterprises. Through the implementation of the employee stock ownership plan, let employees truly become shareholders of the company, exercise shareholder rights, and advance and retreat with the growth of the company, which is a multi-purpose measure.

(III) the new third board listed enterprises to strive to be the pilot units of the employee stock ownership plan of state-owned enterprises has important reference significance for the continuous improvement of employee stock ownership laws and regulations.

The employee stock ownership plan of state-owned enterprises is still in the pilot stage. As an enterprise that has been connected to the capital market, the company's management mechanism is relatively complete, and has a certain competitiveness in trial production in the same industry, it is very suitable for the requirements of the pilot enterprises. At the same time, as a non-listed public company, the NEEQ listed companies have their own special identity attributes and run the special business rules of the national SME share transfer system. Therefore, the practical experience of implementing employee stock ownership plans in state-owned enterprises listed on the New Third Board has very important reference significance for hundreds of companies listed on the New Third Board and for state-owned enterprises.

Complexity Analysis of the Implementation of Employee Stock Ownership Plan in State-owned Enterprises Listed on the New Third Board in 3.

Dispersion of (I) applicable law

Different from listed companies, there are clear legal provisions for reference in the implementation of equity incentives, such as the "Administrative Measures for Equity Incentives of Listed Companies", "Implementation Measures for the Implementation of Equity Incentives by State-controlled Listed Companies (Domestic)", etc., the NEEQ listed companies are non-listed The state has not issued special regulations for equity incentives for non-listed public companies, which are generally applicable to the Company Law and the Partnership Law. Special provisions apply to special industries. For example, the "Notice of the Ministry of Finance, the People's Bank of China, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission on Regulating the Internal Employee Stock Ownership of Financial Enterprises" applies to the financial industry. Therefore, for the state-owned enterprises listed on the New Third Board, there is currently no set of special system regulations and guidance on the application of the law. This will inevitably lead to the decentralization of the implementation of employee incentives in the new third board listed state-owned enterprises in the application of the law, to meet the requirements of state-owned assets supervision and the new third board market at the same time, but also to take into account the conflict between the provisions. The inconsistency in the timing of the introduction of state-owned regulatory regulations and the new three-board trading rules and the inconsistency in content have made it more difficult for state-owned enterprises listed on the new three-board to operate employee stock ownership schemes.

The tedious nature of (II) procedures

As a state-owned enterprise listed on the New Third Board, the introduction of core employees and strategic investors while implementing the mixed reform does not comply with Articles 45 and 46 of the Measures for the Supervision and Administration of State-owned Assets Transactions of Enterprises. Investors shall be publicly solicited through the website of the property rights trading institution. That is to say, when the state-owned enterprises listed on the new third board implement the private placement of equity incentive, in addition to the approval process of the state-owned assets supervision department, they also need to go to the property rights trading center to perform the procedures of entering the market. Only after the delisting investors are determined can they continue to perform the process of private placement of the new third board. To a certain extent, the above provisions increase the complexity of the targeted issuance procedures of state-owned enterprises listed on the new three boards. The author is currently involved in the new three board listed state-owned enterprise employee stock ownership project, it is facing the above problems. Therefore, it is very necessary and important to link up the procedures for performing the duties of various competent authorities and to design a feasible scheme of employee stock ownership plan in a legal and compliant manner.

Long (III) time period

Due to the complexity of the procedures for the implementation of employee stock ownership plans in state-owned enterprises listed on the New Third Board, it will inevitably lead to a long and uncertain time period for the implementation of the entire plan. The private placement of new third board enterprises with non state-owned background generally takes less than six months from negotiation with qualified investors to disclosure and completion of the report on stock issuance in the national share transfer system for small and medium-sized enterprises. From the perspective of the current operation of the project, it has been nearly twelve months from the formulation of the time plan schedule alone. In this process, it is necessary to list state-owned enterprises, shareholders, qualified investors, employees who meet the requirements and incentive requirements, and intermediaries. It can only be achieved with the cooperation of agencies and regulatory agencies. If any one of these links is delayed, it will affect the implementation progress of the whole plan.

4. Suggestions on the Implementation of Employee Stock Ownership Plan for State-owned Enterprises Listed on the New Third Board

The (I) proposes to formulate special business rules for employee stock ownership in new three-board enterprises.

As a national securities trading place established in accordance with the Securities Law with the approval of the State Council, the new third board should fully recognize the status of the new third board as an independent market. The author believes that the national SME share transfer system should formulate special business rules for the employee stock ownership plan of the new third board listed companies, and establish regulations that meet the conditions of the new third board listed companies. For the state-owned enterprises listed on the new third board, the independent positioning of the new third board market should be fully recognized. After the state-owned enterprises have completed the internal audit process of the state-owned assets supervision department and the superior group, and strictly completed the audit and evaluation work, can employees participate in the private placement under the condition of meeting certain preconditions (mainly to ensure the legal compliance of state-owned assets transactions and not to cause the loss of state-owned assets), especially the introduction of strategic investors, adopt a non-public agreement to increase capital, determine the price of private placement and the main body of investment, so as to reduce the link of openly soliciting investors in the property rights trading center. First, it can greatly reduce the operation process time of the whole state-owned enterprises listed on the new third board. Second, it can be more conducive to the market competition vitality of the state-owned enterprises listed on the new third board and promote the liquidity trading of equity.

(II) strengthen the training of regulations and policies for senior executives of state-owned enterprises listed on the new third board

One of the starting points for state-owned enterprises to implement employee incentive policies is to improve the equity allocation of state-owned enterprises and improve the market competitiveness of state-owned enterprises, but more importantly, to give employees the right to govern the enterprise. However, in practice, many state-owned enterprises, especially provincial secondary and tertiary enterprises, do not understand the laws and policies on mixed ownership reform, state-owned assets supervision and even employee stock ownership plan issued by the state. To a certain extent, it is easy to cause the difficulty of issuing and implementing policies, resulting in the situation that employees do not respond positively to equity incentives and the superior group forcibly apportionment, which can neither achieve the effect of employee incentives nor optimize the equity structure of the enterprise. Therefore, when implementing employee equity incentives for state-owned enterprises listed on the New Third Board, it should be recommended that project lawyers, sponsoring securities firms, and leaders of superior groups should fully interpret laws and policies while strengthening the training of corporate executives and core personnel who meet the conditions for employee stock ownership., So that the participants of the employee stock ownership plan can fully understand the system and fully exercise their rights.

5. closing remarks

The author believes that it is imperative for state-owned enterprises listed on the new third board to implement employee equity incentive, and it is also a measure that the advantages outweigh the disadvantages. State-owned enterprises should grasp the current pilot work opportunities, actively promote the employee stock ownership plan, lay a stable practical foundation for the follow-up state-owned enterprises to open up the employee stock ownership plan, and put forward more practical and effective reform suggestions.

Comments:

[1] "Review of the performance of the new three-board state-owned enterprises, three of the 26 new three-board state-owned enterprises have implemented employee stock ownership plans", wind information, Yuan Ji (analyst, chief research officer) ,2016.8.31

[2] "New Third Board Equity Incentive Restricted Qualified Investors and Other Systems to be Improved", New Third Board Daily, Chen Jianmi, 2017.6.14