Major issues related to equity incentives
Incentive plans are programs established to give benefits to
employees to reward them for improved commitment and
performance and as a means of motivating their future
performance. They are designed to supplement base pay and
fringebenefits. Incentive plans are frequent and effective
mechanisms China's companies have used in the past year
to retain their key employees and stimulate their
China's securities regulator, the China Securities
Regulatory Commission ("CSRC"), has announced new
rules on incentive plans for listed companies: the Memoranda on
Issues Regarding Equity Incentives No. 1 and No. 2, issued by
the Supervision Department of the CSRC on May 6, 2008.
As incentives programs frequently include stock option
plans, and the targets of those plans are key management
officials who frequently derive high incomes from their plans,
these rules constitute an effort to prevent those officials
from reaping improper gains resulting from favorable
For example, according to Memorandum No. 2, listed companies
may not introduce share option schemes shortly before
announcing major decisions. In addition, listed companies may
not carry out major actions such as new stock issues, asset
injections or bond offerings within 30 days after having
announced an incentive plan and obtaining shareholder
Likewise, companies are prohibited from introducing
incentive plans during or within a 30-day period after the
announcement and completion of major corporate decisions. In
addition, the memoranda prohibit shareholders from directly
awarding or transferring shares to the object of the incentive
plan (mainly the management officials) as the source of share.
Shares must be awarded via the public market, and the company
must purchase them back and record them with CSRC before
awarding them to the object of the incentive plan.
China's media have reported that the CSRC's
action was taken in response to recent attempts by several
companies to introduce incentive plans immediately prior to
disclosing positive corporate information. Certainly, the
timely intervention of the CSRC will serve to benefit both
listed companies and their shareholders. This would undoubtedly
protect the interests of the minor shareholders.
On a related issue, the two Memoranda clarify major issues
related to equity incentives. These include the following:
Issues related to the withdrawal of incentive funds
– i.e., the withdrawal of the incentive funds for
the purpose of making the incentive plan must be carried out
according to the laws, regulations and the Articles of
Association and the Accounting Rules;
Shareholders and effective controllers becoming incentive
targets. In principle, a shareholder or effective controller
whose stocks occupy more than 5% of the total equity stocks
of a joint stock limited company shall not become incentive
targets, unless approval is passed via vote at a general
shareholders' meeting. Shareholders who become
incentive targets shall not participate in voting on the
matter in the meeting.
Discounts granted on restricted stocks and the
qualifications of incentive targets. These are new
clarifications on incentive plans. Restricted stock programs
are designed to reward key management officials for meeting
performance standards or serving a fixed term in a company.
If the restricted stock is obtained from an additional amount
listing, the pricing principle and the restricted stock terms
should be in accordance with the Management Rule regarding
the issuance of the securities of the listed company.
To summarize, rules concerning incentive plans for listed
companies have been tightened to prevent key management
officials from deriving improper gains arising from favorable
timing and to protect the interests of the shareholders. At the
same time, some issues related to incentive plans have been
clarified to ensure the transparency of listed
companies' implementation of these plans. On a separate
note, the issue of shareholders and effective controllers as
possible incentive targets, which might motivate them to
contribute more to a company, remains unaddressed.
The Hon'ble High Court of Bombay has held that where a Scheme of Amalgamation is executed between two companies registered in two different states [...], then the said two orders are two independent instruments.
Lawyers are pretty good at figuring it out quietly and amicably among themselves, without recourse to a public courtroom.
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