Equity incentive rules modified for overseas listed companies

On 25 February, the State Administration of Foreign Exchange (SAFE) published the Notice on the Issue Regarding Foreign Exchange Control for Individuals Inside China Who Participate in Equity Incentive Plans of Overseas Listed Companies (document 7). At the same time, SAFE also repealed the Participation by Individuals Inside China in Foreign Exchange Control Operating Procedures such as Employee Stock Ownership Plans and Share Option Schemes of Overseas Listed Companies (document 78), which came into effect from 2007. Compared with document 78, document 7 contains more detailed provisions and updates in the following areas.

Scope of application

In document 7, “overseas listed companies” are expanded to be defined as “companies listed on the stock exchanges outside China (including Hong Kong, Macau and Taiwan)”. An unnecessary description in document 78 – “companies shall include Chinese-funded and non-Chinese-funded holding companies” – was deleted. According to the above definition, the equity incentive plans of offshore non-listed companies are not subject to filing or registration for the purpose of foreign exchange control, as mentioned in document 7.

In document 78, “domestic companies inside China” were defined only as PRC companies listed in overseas stock exchanges, or the parent companies, subsidiaries and branches in China of overseas listed companies. Document 7 has expanded the definition of “domestic companies inside China” to cover not only the permanent representative offices in China of overseas listed companies, and also the “companies and partnerships at all levels in China which have a controlling relationship or a de facto control relationship with overseas listed companies”. This has provided a legal basis for Chinese employees of overseas listed companies to participate in equity incentive plans to a greater extent.

Kevin Xu is a partner and Sean Liu is an associate at Martin Hu & Partners (MHP Law Firm)