- Introduction
Employee share option plans (ESOP)[1] have become a popular way for companies to retain key people. Vietnam has embraced this trend. The laws that surround ESOPs for Vietnamese companies focus only on public companies, but any Vietnamese joint stock company can create an ESOP. This piece will focus on public companies. That is, a joint stock company that: (i) has successfully made its initial public offer of shares, or (ii) has paid-up charter capital of at least 30 billion Vietnamese dong and 10% of the voting shares are owned by at least 100 non-major shareholders.[2] Shares of a public company categorized as (i) are listed and traded on the Stock Exchange. Those of a public company categorized as (ii) are registered for trading on the system of unlisted shares (Upcom), and may be listed on the Stock Exchange after two years from the first trading date on Upcom if all listing requirements are satisfied.
- ESOPs and the legal framework
2.1. Statutory compliance: An ESOP which is created by a public company is governed by the Law on Securities and by some other regulations.[3] Various conditions must be met, and this is so whether the ESOP offers shares in return for a consideration or for free. However, the conditions are not onerous:
- Approval by General Meeting of Shareholders (GMS);
- Eligibility to participate, list of eligible employees, principles that determine the total shares to be issued, and the period for implementation of the ESOP must all be approved by the GMS or by the Board of Management (BOM) as mandated by the GMS;
- The total number of ESOP shares issued within each twelve month period may not exceed five percent of the outstanding shares;
- An escrow account in the name of the issuer, to receive payment for the shares from the employees–except, of course, in the case of a bonus share plan where payment is not required;
- When shares are issued to expatriate employees, the foreign shareholding must remain within the relevant foreign ownership limits;
- If an ESOP is created by a credit institution, any increase in capital must be approved by the State Bank of Vietnam; if created by an insurer, the increase must be approved by the Ministry of Finance.
In addition to these conditions, in its most recent audited financial statement, a public company must demonstrate sufficient capital from the following sources in order to support the issuance of free ESOP shares: (i) capital gains; (ii) investment and development funds; (iii) undistributed after-tax profits; or (iv) other funds. The total value of capital sources must, of course, not be less than the increased shareholding capital under the ESOP.
A public company must report and file the ESOP documents with the State Securities Commission (SSC). The SSC has seven working days to approve the ESOP. Upon approval, the public company must disclose certain standard information to the Stock Exchange and publicize it on its website. It will need to do so within seven working days prior to the date it completes the ESOP. The completion date[4] is:
- the date amounts are received from the purchase of shares; or
- the date bonus shares are issued in a free share plan.
Results of the ESOP must be reported to the SSC and the Stock Exchange, and they must be announced on the issuer’s website within certain prescribed periods. The SSC will provide the necessary confirmation to the Stock Exchange and to the Vietnam Securities Depository and Clearing Corporation.
If the public company has registered its shares on Upcom or has shares listed on the Stock Exchange, it must register the new ESOP shares with the Vietnam Securities Depository and Clearing Corporation. It will then receive an amended securities registration certificate. The new shares will then be deposited at the Vietnam Securities Depository and Clearing Corporation and employees can trade them on Upcom.
The public company must amend its share listing or share trading information listed with the Stock Exchange either within thirty days from (i) the date its amended enterprise registration certificate is issued by the provincial Department of Planning and Investment (This certificate recognizes the increased charter capital); or (ii) the date the ESOP is completed. The public company must indicate a date when trading can begin for new ESOP shares. Interestingly, the date cannot be less than one year from the completion of the ESOP–highlighting that these shares are special and are intended primarily to be held by employees. In other words, the new ESOP shares may not be transferred for at least one year from the completion date of the ESOP.
2.2. If the issuer is not a public company:
While a public company must comply with somewhat elaborate reporting requirements when it creates an ESOP, a normal joint stock company (ie, a company which is not publically traded) which creates an ESOP, need only follow rather simple formalities to register the charter capital increase.[5] The date when the process is complete is the date of full payment in the case of share purchase (ie, the date of completion of the charter capital increase) or the date of transfer of share title, as approved by the GMS.
2.3. Eligible employees:
The law does not attempt to define employees eligible to participate in an ESOP. This is the company’s decision.
2.4. Transfer restrictions: As mentioned above, ESOP shares issued by a public company may not be transferred for at least one year from the completion of the ESOP. This is a new requirement.
An ESOP of an unlisted joint stock company (whose shares are neither listed on the Stock Exchange nor registered for trading on Upcom) may decide whether to impose limitations on the transfer of ESOP shares. If it wants to control ESOP shares, it may require a lock-up period within which a participating employee cannot sell or transfer the vested shares. An ESOP may also outline certain circumstances to allow the company to recall ESOP shares. These circumstances are, for example: an employee is dismissed or terminates her employment within the lock-up period. An ESOP of a non-listed company may require that shares owned by an employee be offered to the company first or may have a mechanism to fix or control price.
2.5. Price of ESOP shares: There is no rule on how a company decides the ESOP’s offer price. A public company may determine it at fair market value or at a par value of the shares or in other ways.
For example, Binh Duong Water – Environment Joint Stock Company (BWE) adopted an ESOP in 2021 pursuant to Resolution No. 02/NQ-DHCD/2021 dated March 12, 2021 of the annual meeting of the GMS 2021. BWE planned to sell 5,420,000 shares at VND 16,000 per share. The par value was VND 10,000 per share. The lock-up period was fixed at one year. The number of shares was fully subscribed and fully paid by 87 employees.[6]
- Conclusion
ESOPs are obviously an effective way to reward staff which a company wants to retain and to attract new talent. They are available to both publically listed companies and private joint stock companies. Companies will take into account their fiscal situation, business performance and their goal to retain employees. Risks remain, of course, but ESOPs are a proven effective option to encourage employees to contribute to the business development in their role as shareholders.
[1] Sometimes called “employee stock ownership plans”.
[2] Law on Securities No. 54/2019/QH14 dated November 26, 2019, Art. 32. A major shareholder is a shareholder holding at least 5% of an issuer’s voting shares.
[3] Decree No. 155/2020/ND-CP of the Government dated December 31, 2020, Circular No. 118/2020/TT-BTC of the Ministry of Finance dated December 31, 2020.
[4] The date of completion of the ESOP must not be later than 45 days from the date on which the SSC provides written notice to the public company that it may implement the ESOP.
[5] Law on Enterprises No. 59/2020/QH14 dated June 17, 2020, Decree No. 01/2021/ND-CP of the Government dated January 4, 2021, Circular No. 01/2021/TT-BKHDT of the Ministry of Planning and Investment dated March 16, 2021.
[6]Information Disclosure No. 11/CBTT/2021 dated April 26, 2021 and No. 13.1/CBTT/2021 of Binh Duong Water – Environment Joint Stock Company (BWE) which are posted on BWE’s website.