ESOP: The list of 30 FQAS under viewpoint of securities and employment

Recently, ESOP has been one of popular reward forms in Vietnam, in which many enterprises have applied to appreciate employees’ contributions and retain talents. In addition to the perspective of capital and securities, ESOP can be considered from the perspective of labor relations. 

Therefore, through 30 FQAs below, BLawyers Vietnam would like to introduce an overview of relevant legal issues regarding ESOP.

1. What is ESOP?

ESOP (Employee Stock Ownership Plan) is stocks issued by public companies under the program selected for employees. Therefore, only employees usually those who have worked in a company for a long period or have made positive contributions to the company’s development, are entitled to receive ESOP. A company can issue ESOP to reward employees or sell to employees at a preferential price.

2. Is ESOP different from bonus securities?

Yes, it is. By law, stocks are a type of securities. ESOP means stocks used as bonuses for employees; in other words, it is a type of bonus securities for employees. However, bonus securities are not the same as ESOP because bonus securities can also be bonus stocks for other subjects, such as shareholders. Additionally, bonus securities are also a term that foreign institutions use to award securities to Vietnamese employees working in Vietnam-based foreign institutions, and this is a form of offshore indirect investment. Therefore, ESOP and bonus securities are not the same.

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3. How does the issuance of ESOP affect the charter capital of the enterprise?

Issuing ESOP increases the number of the company’s shares. This means that the charter capital of the company will increase.

4. What are the benefits and risks of issuing ESOP for enterprises?

In terms of benefits, the issuance of ESOP helps enterprises retain talents and encourage them to improve their performance to contribute to enterprises. Besides, enterprises will not have to bonus by cash, so enterprises can retain a significant source of cash for production and enterprise activities.

In terms of risks, the issuance of ESOP causes stock dilution, reducing the value of a company’s stocks. This may lead to capital withdrawal of existing shareholders. In addition, some senior management can take advantage of this policy to buy a huge number of company stocks at a low price. This is also a form of speculation in the stock market and the cause of market manipulation.

5. What are the benefits and risks of receiving ESOP for employees?

In terms of benefits, owning ESOP means that the employee has become one of the shareholders. When the company develops, the stock price on the market increases, employees can transfer them at higher prices, thereby earning profits. In addition, employees can also receive dividends that are equivalent to the percentage of shares that they hold.

In terms of risks, if the company goes bankrupt or fails, employees may not receive the bonus that they should have received and lose the money they spent purchasing ESOP at a preferential price.

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6. What are the conditions to issue ESOP?

By law, the issuance of ESOP must satisfy the following conditions:

  1. Having a plan of issuing stocks under the program selected for employees approved by the General Meeting of Shareholders (“GMS”);
  2. The total amount of stocks issued under the program every 12 months shall not exceed 5% of the company’s outstanding stocks;
  3. Having criteria and a list of employees being eligible to join the program, principles to determine the number of stocks that company will distribute to each subject and time of implementation under the GMS’s or the Management Board’s approval;
  4. Other conditions as prescribed by law.
7. Is it illegal for an unprofitable business issue ESOP to reward employees?

The law does not stipulate that only profitable businesses are entitled to issue ESOP. However, the law provides when the company issues ESOP to reward employees, the total value of financial sources used to issue ESOP must not be lower than the total value of the share capital increased under the ESOP issuance plan, which is already approved by the GMS. Thus, if the business is unprofitable in the previous year but still satisfies the above conditions, it is legal to issue ESOP to reward employees.

8. Which capital sources do enterprises use to issue ESOP?

They include share capital surplus; development investment fund; undistributed after-tax profits; and other funds (if any). These capital sources must be based on the financial statement of the latest period which is audited by an accredited audit firm.

9. Can foreign institutions issue ESOP?

A foreign institution is an organization established in a foreign country under a foreign law; therefore, foreign institutions are not allowed to issue ESOP under Vietnamese law. However, foreign institutions can reward Vietnamese employees working in Vietnam-based foreign institutions with bonus securities. Bonus securities for employees in Vietnam may not be traded on Vietnam’s securities market.

10. Are there any restrictions for foreign employees when receiving ESOP?

In case the employee is a foreigner, the issuance of ESOP must meet the regulations on foreign ownership ratio as prescribed by law. Specifically, as follows:

  1. A public company operating in an investment field or a business line for which a treaty that Vietnam is a contracting party prescribes a foreign holding rate, such treaty shall apply;
  2. A public company operating in an investment field or a business line subject to conditions applicable to foreign investors, the regulations on foreign holding rate specified in the portfolio shall apply. In case the conditional market access investment field or business line in the portfolio does not specify the specific foreign holding rate conditions of a foreign investor in an economic organization, the maximum foreign holding rate at the company is 50% of the charter capital;
  3. Other cases as prescribed by law.

Therefore, foreign employees may be restricted in the foreign ownership rate under the law.

11. Can the parent company issue ESOP to employees of the subsidiary?

According to the prevailing law, contracts, transactions, and relationships between the parent company and the subsidiary company shall be established and executed independently and equally under conditions applied to independent legal entities. Therefore, the labor contract between the employee and the subsidiary only establishes the labor relationship between these two parties. The parent company does not have any rights or obligations towards the employees of the subsidiary. Therefore, the parent company is not allowed to issue ESOP to reward employees of the subsidiary.

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12. What are reporting documents required to carry out the issuance of ESOP?

To issue ESOP shares, the following documents are in need:

  1. A report of issuing stocks under the law;
  2. A decision approving the plan on issuing stocks for employees of the GMS;
  3. A decision of GMS or Management Board (in case of being authorized by GMS), approving the criteria and list of employees eligible to join the program;
  4. The financial statement for the latest period audited by an accredited audit firm in case of issuing bonus stocks for employees;
  5. Other documents as prescribed by law.
13. What are the order and procedures for issuing ESOP?

An enterprise issues ESOP in the following steps:

Step 1: The issuing organization sends reporting documents on the issuance of stocks to the State Securities Commission of Vietnam (“SSC”).

Within 07 working days from the date receiving the complete and valid reporting documents on the issuance, the SSC shall notify in writing to the issuing organization and post such receipt on the SSC’s website; in case of refusal, such authority shall issue a written reply clearly stating reason.

Step 2: The issuing organization publicizes the notice of issuance on its websites and the Stock Exchange within 07 working days from the date on which the SSC issues notice on the receipt of sufficient reporting documents on the issuance.

14. Are ESOPs transferable? If yes, who are the recipients of ESOP transfer, and are there any restrictions?

By law, a holder cannot transfer ESOP for at least 01 year after the date of completion of the issuance. After the expiry of the above time limit, ESOP is freely transferable. The law does restrict the subject that can receive ESOP shares transfer, but these subjects must ensure that their ownership ratio in the company does not exceed 50% if they are foreign investors or another percentage that is specified in an international treaty which Vietnam is a member.

15. How do employees pay the enterprise for ESOP purchases?

According to the law, the organization issuing ESOP shall open an account blocked by the bank to receive money from employees purchasing ESOP. Therefore, employees will make the payment for the purchase of ESOP by transferring from employees’ bank accounts to the blocked bank account.

16. Can employees who own ESOP shares receive dividends?

When employees hold ESOP shares issued by the company, they will become shareholders of the enterprise. Accordingly, one of the rights of shareholders prescribed by law is to receive dividends under the decision of the GMS. Therefore, employees who own ESOP shares will be paid dividends in accordance with the law.

17. Rights of employees when owning ESOP shares of the company?

Employees who own ESOP shares of the company shall have the following rights:

  1. Participating in, making comments, and exercising the right to vote at the GMS;
  2. Accessing names and addresses on the list of voting shareholders; requesting rectification of incorrect information about themselves;
  3. Receiving part of the remaining assets in proportion to their holdings in the company when the company is under dissolution or goes bankrupt; and
  4. Having other rights provided by law.
18. Do employees owning ESOP shares have any obligations to the enterprise?

Employees who own ESOP shares shall have the following obligations:

  1. Fully and punctually paying for their subscribed shares;
  2. Complying with the company’s charter, rules and regulations;
  3. Complying with resolutions and decisions of the Management Board and the GMS; and
  4. Having other obligations provided by law.
19. Can enterprises be recognized expenses to determine corporate income tax (“CIT”) related to the issuance of ESOP shares?

Expenses directly related to the issuance of shares (except for shares of liabilities) and dividends of shares (except for dividends of shares of liabilities), transactions of treasury shares, and other expenses directly related to the increase or decrease in the owner’s equity of the enterprise shall not be deductible when determining taxable income.

Therefore, the cost of issuing ESOP shares is considerable as an expense related to the issuance of shares of the enterprise. Thus, the enterprise cannot include it in the deductible expense when determining CIT.

20. Do employees have to pay personal income tax (“PIT”) when receiving ESOP shares?

Employees who receive ESOP shares from an enterprise must pay PIT on income from securities transfer at the tax rate of 0.1%/ transfer price/ each transfer.

21. How is the face value of ESOP shares determined? Does the law provide a minimum or maximum face value?

According to the law, the issuing price or the principle of determining the ESOP issuing price shall be determined by the enterprise itself. If the issuing price and principles for determining the price are not specified, the ESOP issuing price shall be determined according to the provisions of the Law on Enterprises.

Therefore, there is no regulation on the minimum or maximum price of ESOP shares. However, the purpose of issuing ESOP is to allow employees to buy shares of the company at a price that is cheaper than the market price. So, basically, the price of ESOP cannot be greater than the current share price of the company.

22. Do shareholders of the company have the right to redeem ESOP shares from employees?

One of the conditions for the company to issue ESOP shares is that the ESOP must be restricted from transferring for at least 01 year from the last date of the issuance period. Therefore, shareholders can only redeem employees’ ESOP shares after a period of 01 year or a longer period from the date of issuance, depending on the company’s regulations.

23. What enterprise forms and what minimum charter capital enterprises can issue ESOP shares?

Currently, the law only regulates the issuance of ESOPs by public companies which means that only companies that have listed their securities on the stock exchange can issue ESOP.

By law, a condition to become a public company is that the joint-stock company must have the charter capital at the time of registration for a listing of VND30 billion or more based on the latest financial statement which had been audited.

24. Does an unlisted company on a stock exchange have the right to issue ESOP shares?

The current law only stipulates the conditions, orders, and procedures for issuing ESOP for companies listed on the stock exchange,. There is also no regulation on the issuance of ESOP by unlisted joint-stock companies. Therefore, principally, if a company that has not been listed on the stock exchange issues ESOP shares, such issuance is not in accordance with the law.

25. In case an employee owning ESOP shares violates labor discipline and gets fired, how to handle ESOP shares?

When issuing ESOP shares, enterprises must develop an ESOP issuance plan. Accordingly, if this plan contains the content of buying back the employee’s shares when enterprise fired the employee, the enterprise has the right to buy back the ESOP according to the order and procedures prescribed by law. In contrast, if there is no provision on the withdrawal of ESOP, the employee will continue to own the ESOP after being disciplined for dismissal.

26. Does the enterprise have to account for the cost of issuing ESOP shares?

By law, expenditures directly related to the issuance of shares (except for shares of liabilities) and dividends of shares (except for dividends of shares of liabilities), transactions of treasury shares, and other expenditures directly related to the increase or decrease in equity of the enterprise shall not be deducted when determining taxable income. Therefore, the enterprise cannot record cost of issuing ESOP shares in its accounting books.

27. Does the enterprise have the right to withdraw ESOP shares after issuing to employees?

The current law has not had specific provisions on the withdrawal of ESOP. However, the enterprise can withdraw shares by buying back ESOP shares according to the ESOP issuance regulations approved by GMS.

28. Can credit institutions issue ESOP shares?

Yes, they can. However, State Bank of Vietnam must approve the issuance of ESOP.

29. When a dispute arises between an employee and an enterprise relating ESOP, which law will govern that dispute?

ESOP shares are both a form of bonus for employees pursuant to the Labor Code and stock according to the provisions of the law on securities. Therefore, depending on the specific case, the labor code or the law on securities or even both laws shall regulate the dispute that occurs related to the transaction of ESOP shares.

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30. Can ESOP shares be convertible into other types of shares?

After the expiration of the transfer restriction period, ESOP shares can be convertible into ordinary shares, and the employee who owns the shares has the rights of a common shareholder unless otherwise specified by the company. Thus, it can be understandable that ESOP shares will become common shares after the transfer restriction period. According to the law, ordinary shares cannot be converted into preference shares. Therefore, ESOP shares are not convertable into other shares.

Should you have any questions about the above contents, please revert to BLawyers Vietnam at consult@blawyersvn.com. We are more than happy to hear from you!

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