The stock appreciation rights incentive for listed national companies
On 24 October 2019, the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council issued the Notice on Further Improving Equity Incentive Work for Listed Companies Controlled by Central Enterprises, encouraging listed companies controlled by central enterprise companies to implement equity incentives.
Among various incentive tools, stock appreciation rights is obviously different from others: the company’s stock is taken as the virtual target stock, and on the premise of meeting the performance evaluation standard, the company pays the difference between the exercise price and the redemption price in cash, stocks, or a combination of the two. This article, based on cases of A-share listed companies implementing stock appreciation rights, analyses its application in central enterprise companies for reference.
According to information released by stock exchanges, the main contents of the equity incentive plan for A-share listed companies applying stock appreciation rights in the past three years are as follows:
(1) Management bodies. The plan of stock appreciation rights is drafted by the compensation and review committee of the board of directors, submitted to the board for deliberation, and finally approved by the highest authority of the listed company, the general shareholders’ meeting. The board of supervisors and independent directors will supervise the implementation of the stock appreciation rights plan, and provide relevant opinions on whether there is obvious damage to the interests of the company and all shareholders.
(2) Incentive objects. In the past three years, for A-share listed companies implementing a stock appreciation rights plan, the incentive objects include foreign employees, or employees who have employment or labour relations with listed companies, their branches or subsidiaries, and work overseas.
(3) Validity period. The relevant laws and regulations do not specifically provide for the validity period of stock appreciation rights, but the validity period of the cases of A-share listed companies applying stock appreciation rights in the past three years is 48 months, including a 12-month waiting period and 36-month exercise period.
(4) Incentive amount. Similarly, the relevant laws and regulations do not
specifically provide for the incentive amount of stock appreciation rights, but in the past three years the incentive amount of the cases of A-share listed companies applying stock appreciation rights is 0.001% – 0.1771% of the total share capital of the company, accounting for a relatively small proportion.
(5) Redemption method. In the case of stock appreciation rights as an incentive tool, the company can redeem in cash, stocks, or a combination of the two. However, in the past three years, the cases of A-share listed companies applying stock appreciation rights have all chosen cash.
According to the information released by stock exchanges, there has not been a case of equity incentives implemented by central enterprise companies in the form of stock appreciation rights in the past three years. Combined with the above-mentioned cases of listed companies applying stock appreciation rights, and other cases of central enterprise companies implementing equity incentives, in addition to the relevant provisions of laws and regulations, the following issues should be focused on in the specific implementation process of stock appreciation rights as an equity incentive adopted by central enterprise companies:
(1) Approval and filing. Before the board of directors of the listed company reviews an equity incentive plan, the state-owned controlling shareholders of the central enterprise companies should communicate and co-ordinate with the state-owned assets supervision and administration authority. Before deliberations by the general shareholders’ meeting, it should be reviewed and approved by the central enterprise group and submitted to the SASAC for approval.
Moreover, if the equity incentive plan is granted in stages, the staged implementation plan should be submitted by the state-owned controlling shareholders to the central enterprise group for review and approval before the deliberations of the board of directors. In addition, the central enterprise group should report the implementation of the equity incentive of the central enterprise companies to the SASAC after the disclosure of the company’s annual report.
(2) Compliance. The stock appreciation rights incentive does not involve the issuance of the actual shares of the listed company, and recently all A-share listed companies have chosen cash. Therefore, it will not affect the total share capital and the share capital structure of the listed company, nor will it involve the change of the proportion of the state-owned shares of the listed company. However, the stock appreciation rights must still conform to the Measures for the Administration of Equity Incentives for Listed Companies, the notice, and the relevant regulations of the place where the stock is listed and traded.
Meanwhile, because it does not involve the direct issuance of shares by listed companies, if the incentive involves foreign employees, especially foreign employees working outside China, a reasonable design of redemption method of stock appreciation rights can effectively reduce the stock subscription, capital entry and exit, and other procedures that foreign employees need to perform to participate in the incentive, so as to enhance the incentive effect.
(3) Disclosure. To implement stock appreciation rights, the listed companies should also perform the obligation of information disclosure in accordance with the Company Law, the Securities Law, the Measures for the Administration of Equity Incentives for Listed Companies, and the relevant regulations of the place where the stock is listed and traded.
(4) Cross-border matters. For implementation of the incentive plan of stock appreciation rights, if the incentive object or implementation platform involves overseas entities, the provisions of overseas laws and regulations on labour employment, employee incentives, taxation and other aspects should be fully considered before the incentive plan is formulated, so as to ensure that the corresponding plan can be implemented legally and obtain good incentive effect.
After the issuance of the notice, some central enterprise companies have actively implemented equity incentives. Stock appreciation rights can play an incentive role without affecting the state-owned equity structure of the central enterprise companies, while simplifying the procedures to be performed by individual incentive objects at the same time. Thus, it can be used as an effective way for central enterprise companies to implement equity incentives.