Offshore equity incentive schemes raise exchange control issues

Many offshore listed companies are extending their equity incentive schemes to the Chinese employees of their PRC subsidiaries. PRC law expressly provides for the creation of such schemes by offshore listed companies. Schemes usually take the form of employee stockholding plans and employee stock option plans.

The holding by a Chinese employee of stocks or options in an offshore listed company is, in essence, a direct investment by that individual in foreign securities. However, China currently restricts capital account transactions, and direct investment in foreign securities by Chinese individuals has not been completely deregulated. Accordingly, the equity incentive schemes of offshore listed companies have drawn the attention of the PRC’s exchange control authorities.

The jurisdiction of the foreign exchange control authorities over the employee equity incentive schemes of offshore listed companies is established by the following laws and regulations:

• the PRC Foreign Exchange Administrative Regulations (Order No. 532 of 2008 of the State Council);
• the Individuals’ Foreign Exchange Administrative Measures (Order No. 3 of 2006 of the People’s Bank of China);
• the State Administration of Foreign Exchange Issuance of the Individuals’ Foreign Exchange Administrative Measures Implementing Rules (Hui Fa [2007] No. 1),
• the General Affairs Department of the State Administration of Foreign Exchange Issuance of the Domestic Individuals’ Participation in Overseas Listed Company Employee Stockholding Plans and Stock Option Plans Etc. Foreign Exchange Management Operating Procedures Notice (Hui Zong Fa [2007] No. 78); and
• the General Affairs Department of the State Administration of Foreign Exchange Delegation of the Examination and Approval Authority for Initial Foreign Exchange Quotas for Purchase and Payment and Opening of Foreign Exchange Accounts in Connection with the Participation by Domestic Individuals in the Employee Stockholding Plans of Listed Companies Notice (Hui Zong Fa [2008] No. 2).

Gillian Miao is an associate at Martin Hu & Partners (MHP Law Firm)