New requirements for foreign exchange registration of equity incentive plans are now in effect. Overseas-listed companies that grant equity awards to employees of their Chinese affiliates should review their registration status and periodic filing schedules to make sure they are in compliance, especially in view of the new, shorter deadline for filing quarterly reports and the need to file amendments.
On February 15, 2012, the PRC's State Administration of Foreign Exchange (SAFE) promulgated new guidelines governing foreign exchange registration requirements relating to equity incentive plans of PRC-based companies listed on overseas stock exchanges. The guidelines are set forth in SAFE Circular on Issues concerning the Administration of Foreign Exchange Used for Domestic Individuals' Participation in Equity Incentive Plans of Companies Listed Overseas (Circular Hui Fa [2012] No. 7) (Circular 7). Circular 7 superseded the old guidelines Circular Hui Zong Fa [2007] No. 78 (Circular 78) and Circular Hui Zong Fa [2008] No. 2. Circular 7 took effect upon its promulgation.
Circular 7 defines the scope and content of SAFE's registration and reporting of foreign exchange matters relating to employee participation in equity incentive plans, reduces the number of supporting documents required for initial registration, and shortens the time for filing of quarterly reports. Circular 7 also requires an amendment to the foreign exchange registration (SAFE registration) when any major change is made to a registered equity incentive plan, or when the plan is terminated.
Coverage
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Circular 7 covers all types of equity incentive plans that involve the grant of stock or other equity of overseas-listed companies to participants, including employee stock ownership plans, employee stock option plans, stock appreciation rights, restricted stock/restricted stock units, performance shares/ performance share units, phantom stock, stock purchase plans and any other equity incentive plans permitted by relevant laws.
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Covered entities are "domestic companies," defined to include overseas-listed companies that were incorporated in China, PRC branches or representative offices of overseas-listed companies, PRC parent companies, subsidiaries, partnerships and other PRC institutions that directly or indirectly control, or are controlled by, overseas-listed companies.
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Covered participants are directors, supervisors, members of senior management, other employees and those with labor service relationships with domestic companies, regardless of these individuals' citizenship.
Involvement of Agents
A local agent must be appointed to handle the SAFE registration, foreign currency bank account openings, and funds transfers for participants in an equity incentive plan. The domestic company can be the local agent, or it can designate a domestic institution qualified to engage in asset custody as the local agent. An overseas agent is required to handle the exercising of options, purchases and sales of equity shares, and transfers of funds. Circular 7 does not specify who can act as the overseas agent, but presumably the administrator of the listed company's equity incentive plan can be the de facto overseas agent.
Registration Requirements
Initial Registration. Circular 7 has reduced the number of documents required for registration. The local agent must submit the documents, in Chinese or translated into Chinese, relating to each equity incentive plan for SAFE registration. The documents include:
1. An application letter and a SAFE registration form;
2. Documents to prove the authenticity of the equity incentive plan;
3. An authorization letter or agreement between the domestic company and the local agent making the agent solely responsible for SAFE registration matters; and
4. A commitment letter from the domestic company stating the employment or labor service relationship between the participants and the domestic company.
SAFE may require supplemental information. Circular 7 does not specify when the initial registration must be made, but it is prudent to register equity incentive plans promptly after their adoption.
Amendment. In the case of any major changes to an equity incentive plan, such as a change to a key term or a change due to a merger or acquisition, the local agent must amend the SAFE registration within three months after the change occurs.
De-registration. The local agent must de-register the plan within 20 days after the expiration or termination of an equity incentive plan.
Quarterly Reports
The local agent is required to file quarterly foreign exchange transaction status reports within three working days (previously ten working days) after the end of each quarter.
Some Observations
We expect that the requirements under Circular 7 to be applicable to both new equity incentive plans and existing plans that have already been registered pursuant to Circular 78. Therefore, overseas-listed companies that grant equity awards to employees of their Chinese subsidiaries, branches, representative offices, partnerships or other affiliates should review their current SAFE registration status and their periodic filing schedules to make sure they are in compliance with Circular 7.
