The STIB’s new equity incentives

The binding together of the long-term interests of enterprises in such new economy industries as high-tech, the internet, etc., with those of their core employees is an indispensable requirement for a company’s development and growth. Fortunately, the Science and Technology Innovation Board (STIB) has gone beyond the current regulations for A shares, giving the pre-listing employee equity incentive plans of enterprises new room for realizing their effect.

The main relevant rules include the Rules of the Shanghai Stock Exchange for the Listing of Stocks on the Science and Technology Innovation Board (listing rules), the Answers of the Shanghai Stock Exchange to Questions on the Reviews for the Offering and Listing of Stocks on the Science and Technology Innovation Board (review questions) and the Administrative Measures for the Equity Incentives of Listed Companies (measures).

CORE ELEMENTS AND BREAKTHROUGHS

Incentive share pool. Company shares may serve as the subject matter of an innovative tech enterprise’s incentive shares, and may take the form of restricted shares, stock options or other forms recognized by the stock exchange. The total number of valid stocks encompassed in the option incentive plan of an issuer may not exceed 15% of its total pre-listing share capital and may not be encumbered by reserve rights. The author believes that this is a breakthrough on the current “issuer’s equity is clear” requirement for A-share IPOs. Past A-share IPOs did not permit uncertainty or material changes in the equity structure of the issuer during the review period, or in the existing shares during the post-IPO lockup period.

Form of shareholding. The employee shareholding plan of an innovative tech enterprise may indirectly hold shares through a company, partnership, asset management plan, etc.

The STIB goes beyond the existing review criteria for A shares, permitting an employee shareholding plan to serve as a shareholder of the issuer. A brief comparison is provided below.

1. Governance structure. A limited company may have one to 50 shareholders and a stock company two to 200 shareholders. The internal decision-making body is the shareholders’ meeting, board of directors or executive director; and the main basis for its operations is its articles of association. A partnership may have two to 50 individual limited partners. The internal decision-making body is the partners’ meeting, GP; and the main basis for its operations is its partnership agreement. An asset management plan is limited to 200 persons. The internal decision-making body is the employee shareholding plan holders’ general meeting, management committee; and the main basis for its operations is its management measures.
2. Tax costs. Where a limited company serves as the shareholder platform, enterprise income tax is levied and individual income tax on the incentive recipients. A limited partnership shareholding platform only requires each of the partners to file their taxes, usually at the rate of 20% of the investment returns, some regions applying a 3-5% progressive tax system. Asset management plans are first subject to value added tax at the rate of 3% (actually shared by all of the holders), individual income tax on natural persons is governed by different tax provisions that vary depending on the type of income such as dividend income, share transfer income, equity transfer by the platform, etc., and the holders additionally share other operating costs such as the manager’s management fee, the custody fee, etc.