ESOP of Normal Joint-Stock Company

In recent years, Employee Stock Ownership Plan (“ESOP“) is becoming a popular solution for Vietnamese enterprises in their human resources strategy. The issuance of shares under ESOP (“ESOP Shares“) by the public company is subject to regulations of Law on Securities, which shall not be applied for the ordinary joint-stock company. This article expresses some relevant respects of issuing ESOP Shares by the ordinary joint-stock company in compliance with current Vietnamese Law.

Conditions of ESOP Shares issuance

While the public companies planning to issue ESOP Shares shall closely comply with provisions of Decree No. 155/2020/ND-CP promulgated by the Government on 31 December 2020 guiding on the execution of Law on securities (hereinafter referred to as “Decree 155/2020“), the ordinary joint-stock company (“Ordinary Company“) shall not be subject to. Although conditions for ESOP Shares issuance of the Ordinary Company are also not provided in Law on Enterprises as well as other legal documents, the Ordinary Company is recommended to consider and follow the conditions below, which are referenced from those similar to the public company:

  • The ESOP shall be approved by the General Meeting of Shareholders (“GMS“);
  • The criteria and list of employees eligible for ESOP, rules for determination of the quantity of ESOP shares and execution time shall be approved by the General Meeting of Shareholders (or the Board of Directors if authorized by the GMS);
  • When issuing ESOP Shares as a bonus to the employee, the equity must be sufficient for increasing charter capital. In particular, the equity used for issuing ESOP Shares as a bonus shall be determined according to the latest financial statement, which is audited by an accredited audit organization, including the following sources: share premium, development investment fund; undistributed post-tax profit; other funds (if any) used for increasing charter capital as prescribed by laws;
  • When issuing ESOP shares as a bonus to employees, the total value of the sources mentioned above must not fall below the total increase in share capital under the plan approved by the GMS;
  • The issuance of ESOP Shares shall satisfy regulations on foreign ownership ratio in case ESOP Shares are issued to employees who are foreign investors. It means that if the Ordinary Company’s business is conditional for the foreign investor(s) in terms of foreign ownership ratio restriction, the issuance of ESOP Shares to the foreign employees shall not cause the total of foreign ownership ratio to exceed that restriction as provided by laws.

Procedures of issuing ESOP Shares

Although the Law on Enterprises does not provide the issuance of ESOP Shares, in nature, the issuance and offering of ESOP Shares is also a form of private offering equity of shares. Therefore, the Ordinary Company may consider issuing ESOP Shares under procedures of private offering equity of shares as prescribed in Article 124 of Law on Enterprises. Accordingly, the Ordinary Company shall be subject to the following conditions:

a) The offering is not made through mass media;

b) Shares are offered to fewer than 100 employees[1].

The procedures of issuing ESOP Shares are as follows:

Step 1: The GMS decides and approves ESOP, which specifies clearly: quantity of ESOP Shares to be offered, price or rules to define price or authorization to the Board of Directors (“BOD“) to determine the price, other conditions attaching ESOP Shares,…  

Step 2: The GMS or the BOD (in case authorized by the GSM) decides the criteria and list of employees eligible for ESOP, rules for distribution of ESOP Shares and execution timeline;

Step 3: The BOD puts the ESOP, which has been approved by the GMS, into practice.

Step 4: The Ordinary Company conducts licensing procedures as required by laws, including:

  • Registering the acquisition of ESOP Shares by the foreign employees in compliance with Law on Investment and announcing information of such foreign employees as foreign shareholders of the Ordinary Company to the Department of Planning and Investment;
  • Announcing the change of charter capital of the Ordinary Company (after the ESOP Shares have been fully paid or the offering has been finished, as the case maybe).   

Step 5: Upon the completion of ESOP, the Ordinary Company shallupdate its shareholder registry to record the employees acquiring ESOP Shares as shareholders and issue them the certificate of share ownership.

Recommendation

On the one hand, by ESOP, employees’ positive contribution to the company is recognized and encouraged, but on the other hand, ESOP Shares cause the ownership ratio of existing shareholders to be diluted. Therefore, in order to restrict the negative effects of ESOP Shares on the operation and management of the company, the Ordinary Company should pay attention to the following issues:

  • The maximum number of ESOP Shares to be issued should be decided by the GMS. Specifically, the total number of shares issued under the ESOP in each year/each batch shall not exceed a certain percentage of the company’s outstanding shares.
  • ESOP Shares should be subject to transfer restrictions for a certain period of time. This not only helps to ensure the significance of ESOP aiming to retain employees but also prevents some shareholders from taking advantage of ESOP to acquire shares, causing conflicts of interest in the company.
  • In addition, for the transparent issuance of ESOP shares, the payment for ESOP Shares should be made through a bank account.

[1] Article 125.1(b) of Law on Enterprises provides that the company is allowed to (i) offer share in private to fewer than 100 investors, excluding professional securities investors, or (ii) only offer shares to professional securities investors. Therefore, in the author’s opinion, it means the company is allowed to offer ESOP Shares to fewer than 100 employees under ESOP.

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