Equity incentives of unlisted companies via shareholding platform

Q: What advantages do shareholding-platform-type equity incentives have? A: An unlisted company may implement an equity incentive in one of two ways, directly or indirectly: (1) in a direct shareholding-type equity incentive, the employees become shareholders registered with the administration for industry and commerce and directly hold equity in the company; and (2) in a shareholding-platform-type equity incentive (platform incentive), employees indirectly hold equity in the company through a shareholding platform.

Comparatively, the platform incentive has the following advantages: (1) employees’ indirect holding of equity through this platform is conducive to maintaining relative stability in the company’s equity structure; (2) by establishing multiple shareholding platforms, it is possible to circumvent the limit on limited liability companies of having no more than 50 shareholders, and expand the scope of the recipients of the equity incentive; and (3) through the establishment of a partnership shareholding platform, the controlling shareholder, as the general partner of the partnership, can strengthen his control over the company and ensure efficient decision-making in the course of its operations.

A platform incentive also has certain drawbacks, including a lack of flexibility when an incentive recipient withdraws, difficulty in recognizing status as a shareholder, etc., in addition to the tax issues, which are the focus of this column.

He Yu is a partner and Shi Guangyao is an associate at AnJie Law Firm