Legal issues to note when businesses implement ESOP programs

ESOP (Employee Stock Ownership Plan) or the issuance of shares under option program for an employee[1] is a welfare policy allowing the employees to own shares (typically common shares) of the company at a preferential price. The primary objective of ESOP is to align the employees’ interest with those of the company, fostering long-term commitment and enhancing motivation of the employee. The employees eligible for ESOP shares are often long-serving individuals who have substantially contributed to the company’s development.

In the mass media, it is evident that ESOP has been adopted by numerous listed companies in Vietnam, some of which implement it quite frequently, such as FPT (FPT Corporation), MSN (Masan Group Corporation), PNJ (Phu Nhuan Jewelry Joint Stock Company), and TCB (Techcombank – Vietnam Technological and Commercial Joint Stock Bank). Most recently, MWG (Mobile World Investment Corporation) announced plans to issue up to 19.9 million ESOP shares at a price of VND 10,000 per share (while the current market price of an MWG share exceeds VND 50,000). Based on a review of the current legal framework, we believe that the regulatory framework governing the issuance of ESOP shares by public companies and listed companies is relatively comprehensive and well-established (e.g., Securities Law 2019, Decree 155/2020/ND-CP, Circular 19/2003/TT-BTC[2], etc.). However, the legal provisions applicable to unlisted joint stock companies (“non-public joint stock companies”) in this regard appear to lack clarity.

This raises several key questions, being (i) Are non-public joint stock companies permitted to issue ESOP shares?; (ii) What is the legal basis for undertaking such activities?; (iii) What are the conditions, procedures, and processes for issuing ESOP shares?; and (iv) What issues should be noted during the implementation of an ESOP program? In this article, we aim to address these questions in the simplest manner possible.

1. Legal basis for issuing ESOP shares

In our opinion, the Enterprise Law 2020, with its provisions regulating share issuance and corporate governance in joint stock companies, establishes a legal framework for non-public joint stock companies to implement ESOP plans. Key provisions of the Enterprise Law 2020 relevant to ESOP implementation may include:

Article 112 defines relevant concepts, including: (i) “authorized shares of a joint stock company,” which refers to the total number of shares of all types that the General Meeting of Shareholders (“GMS”) resolves to offer to raise capital; and (ii) “unsubscribed shares,” which are authorized shares that have not yet been paid for by subscribers. “authorized shares of a joint stock company,” which refers to the total number of shares of all types that the General Meeting of Shareholders (“GMS”) resolves to offer to raise capital; General Meeting of Shareholders”) decides to offer for sale to raise capital; and (ii) “cunsold shares”
Article 123 provision: (i) “cSell shares“is the act of the company increasing the number of shares and types of shares that are allowed to be offered for sale to increase its charter capital; and (ii) the offering of shares can be carried out in the following forms: offering shares to existing shareholders, private placement and public offering of shares.
Article 125 regulations on the conditions and procedures that non-public joint stock companies must meet and comply with when conducting private offering of shares.
Article 126 regulations permitting the Board of Directors (“Board of Directors”) has the right to decide the time, method and price of selling shares in accordance with the resolution of the General Meeting of Shareholders.

2. Conditions to be met when issuing ESOP shares

We believe that a non-public joint stock company issuing common shares to a specific group of employees as approved by the Board of Directors and having confirmed their participation in purchasing ESOP shares is a form of private offering. The reason is that neither of the other two forms of offering meets the requirements of an ESOP plan. Specifically, not all employees who are entitled to purchase ESOP shares are also existing shareholders, so it cannot be implemented in the form of offering shares to existing shareholders. A public offering of shares is also inappropriate because there is no mechanism to specifically determine the list of subjects eligible to purchase shares and the specific number of shares that can be sold to each subject.

Accordingly, to issue ESOP shares, a non-public joint stock company must fully satisfy the conditions for private share offering, specifically as follows:

There is a plan to issue ESOP shares to employees approved by the General Meeting of Shareholders;
There are regulations on issuing ESOP shares to employees (determining the standards and list of employees eligible to participate in the program, principles for determining the number of shares distributed to each subject and implementation time) approved by the General Meeting of Shareholders or authorized to the Board of Directors for approval; and
Existing shareholders of a non-public joint stock company refuse the preemptive right to purchase ESOP shares offered for sale.

When offering ESOP shares to employees, non-public joint stock companies should note that they must not offer through mass media.[3] (including: posting in newspapers, websites, social networks, …) and at the same time, there must be control measures to ensure that the total number of employees entitled to the rights, the number of existing shareholders and the number of potential investors who can invest in the company in the future does not exceed 100 to avoid being forced to register as a public company without a plan. In addition, foreign employees, when exercising the right to buy ESOP shares, must first complete the procedures for buying shares according to the provisions of the Investment Law (specifically, receiving notice of meeting the conditions for capital contribution, buying shares, buying capital contributions of foreign investors).[4] The company also needs to pay attention to the maximum foreign ownership ratio in the company based on its registered business lines. When the foreign shareholder ownership ratio in the company reaches the maximum level, it will not be allowed to issue ESOP shares to foreign employees to ensure that the foreign ownership ratio in the company is not increased.

3. Procedures for issuing ESOP shares

We believe that a non-public joint stock company can take the following main steps when choosing to issue ESOP shares to employees.

Step 1: The Board of Directors develops regulations for issuing ESOP shares.

The ESOP share issuance regulations are the first important legal document that the Board of Directors and the Board of Management need to prepare carefully and thoroughly to ensure compliance with the law while being clear and transparent about the content with relevant parties (including shareholders, the Board of Directors, employees, and state agencies) to minimize the risk of disputes during the implementation process.

The contents mentioned in the ESOP share issuance regulations may include: presenting the objectives of the ESOP, beneficiaries, the mechanism for allocating purchase rights, the number of ESOP shares expected to be issued, preferential selling price, criteria for selecting employees (e.g. seniority, position, KPI), vesting time and conditions – gradual ownership (e.g. 4 years, 25%/year), transfer restriction period (e.g. 2 years after vesting), ESOP share distribution and management process.

Step 2: Shareholders’ Meeting passes resolution approving ESOP share issuance plan

After completing the development of the ESOP share issuance regulations, the Board of Directors shall convene a meeting of the General Meeting of Shareholders or obtain written opinions from shareholders to approve the ESOP share issuance plan, approve or authorize the Board of Directors to approve the ESOP share issuance regulations, and request existing shareholders to refuse to purchase shares issued under the ESOP plan. The resolution of the General Meeting of Shareholders must ensure the following contents: quantity, issuance price of ESOP shares, beneficiaries and selection criteria, vesting conditions, transfer restrictions and handling plan when employees quit, and authorize the Board of Directors to perform detailed tasks.

Step 3: Determine the list of employees participating in ESOP

The company will introduce and communicate the ESOP program internally. The company’s management will determine a list of employees who meet the selection criteria and are eligible to purchase ESOP shares to submit to the Board of Directors for approval. Based on the authorization of the General Meeting of Shareholders, the Board of Directors will approve the list of employees, the number of ESOP shares eligible to purchase, the vesting schedule and the ESOP share transfer restriction period.

Next, the company’s Board of Directors will send a notice to employees about their rights and how to confirm their registration to purchase ESOP shares within a certain period of time, along with a draft ESOP share purchase contract. Employees have the right to register to purchase part or all of the ESOP shares granted the option. Employees exercise their right to purchase ESOP shares by sending a written confirmation of their rights and a signed ESOP share purchase contract to the company. The Board of Directors will compile and record the list of employees registering to exercise their rights, the number of ESOP shares to be issued in the first batch, and other related contents.

Step 4: Issue ESOP shares to employees

Pursuant to Article 126 of the Law on Enterprises 2020 and the authorization of the General Meeting of Shareholders, the Board of Directors will issue a resolution approving the plan to issue shares under the ESOP program along with the regulations on issuing ESOP shares to employees. Depending on the employee completing the payment for the first ESOP shares to the company, the company will issue a certificate of share ownership to the employee and update the employee’s information in the company’s shareholder register.

Within 10 days after the end of the offering, the company shall submit a dossier of registration for change of charter capital to the Business Registration Office. The dossier must include the following documents:[5] (i) Notice of capital increase; (ii) Minutes of meeting and Resolution of the General Meeting of Shareholders on offering shares to increase charter capital, clearly stating the number of shares offered; (iii) Minutes of meeting and Resolution of the Board of Directors on registering to increase the company’s charter capital after the end of each share sale; (iv) Updated list of shareholders and (v) Documents proving the capital increase.

Step 5: Monitor, check and implement

The implementation of an ESOP plan can be carried out through multiple ESOP share offerings (each year there will be a new offering) based on the specific vesting schedule stipulated in the regulations on ESOP share issuance to employees approved by the Board of Directors. Therefore, after completing the issuance and registering the corresponding increase in charter capital, the non-public joint stock company needs to organize the monitoring of the continued implementation of work related to the approved ESOP plan, issue additional ESOP shares (repeat the work stated in steps 3 and 4 above), handle other situations that may occur in practice, for example: (i) handle the number of ESOP shares that have not been fully purchased in the offering; (ii) ensure compliance with regulations on the transfer restriction period and notification when shares are freely traded; (iii) recall and repurchase issued ESOP shares in some necessary cases.

4. Some other notes

Implementing ESOP not only helps companies retain talent but also creates a driving force for sustainable development, especially in the context of increasingly fierce competition in technology and human resources in Vietnam. For non-public joint stock companies, ESOP can be a flexible and effective tool for human resource management, resource optimization and building an internal shareholder culture. We have some notes on implementing the ESOP plan as follows:

In some cases, issuing ESOP shares to employees can also be considered a form of additional income for employees in addition to salary income. In the current context, employees only have to pay a tax rate of 0,1% on the sale price when transferring ESOP shares in the future. However, issuing additional shares will reduce the ownership ratio of existing shareholders, reduce the income per share, which can cause dissatisfaction among shareholders if the Board of Directors does not provide clear, transparent and convincing explanations to shareholders. In fact, companies have also tried to minimize the impact of share dilution by limiting the number of ESOP shares issued or using share buyback programs to compensate.
After purchasing and owning ESOP shares, employees become shareholders of the company and can have all the rights of ordinary shareholders as prescribed in Article 115 of the Enterprise Law 2020. However, the common point in most ESOP programs that we know is that ESOP shares are restricted from trading within a specific period (possibly from 1 to 10 years) from the time of issuance or do not have voting rights or some other restrictions on rights. In order to comply with current legal regulations and prevent possible conflicts in the future, companies can consider the following solutions: (i) provide information about these restrictions to employees in a complete and transparent manner during internal communications about the ESOP plan so that employees truly understand before choosing to buy ESOP shares; and (ii) clearly stipulate the restrictions attached to ESOP shares issued in the Company’s Charter and shares granted to employees who register to purchase ESOP shares.
After purchasing ESOP shares, employees may have to terminate their employment relationship with the company for various reasons. The company needs to anticipate possible situations to determine how to handle them appropriately and clearly stipulate them in the ESOP share purchase contract signed with the employee to have a mechanism for future application. Non-public joint stock companies need to note that if they choose to buy back ESOP shares issued to employees, they will have to complete the procedure for registering a reduction in charter capital within 10 days from the date of completion of payment for the ESOP share purchase.[6] To avoid having to carry out the above procedures, the company can designate a specific entity to buy back ESOP shares from employees.
The selling price of ESOP shares is often determined to be lower than their real value, however, not all ESOP shares are well received and not all employees are willing to spend money to buy ESOP shares even though the price is attractive. Unlisted companies do not have a market price, requiring internal valuation or hiring an independent unit, which can easily lead to disputes about fair value. Employees may have difficulty reselling ESOP shares if the company has not listed its shares on the stock market. In this case, the company can hire an independent valuation unit to determine the value of ESOP shares objectively, transparently and convincingly, and at the same time, stipulate a mechanism to buy back ESOP shares at a reasonable price when employees want to resell purchased ESOP shares to ensure the ESOP plan is successfully implemented.

If you have any questions regarding the article, please contact us via email: tuan.phung@ptnlegal.com or duong.le@ptnlegal.com.

Disclaimer: This article was prepared by PTN Law Firm LLC (“PTN Legal”) is for informational purposes only. PTN Legal does not warrant or guarantee the accuracy or completeness of this information. The content of the article may be changed, adjusted, or updated without prior notice. PTN Legal is not responsible for any errors or omissions in this article or damages arising from the use of this article in any case.

[1] Equivalent terms are used in the Securities Law 2019 and Decree 155/2020/ND-CP of the Government issued on December 31, 12 detailing the implementation of a number of articles of the Securities Law 2020 (“Decree 155/2020/ND-CP“).

[2] Circular 19/2003/TT-BTC of the Ministry of Finance issued on March 20, 03 guiding the adjustment of increase and decrease of charter capital and management of treasury stocks in joint stock companies (“Circulars 19 / 2003 / TT-BTC“).

[3] Article 125.1 Law on Enterprises 2020.

[4] Article 125.3 Law on Enterprises 2020.

[5] Article 123.4 of the Law on Enterprises 2020; and Articles 51.1 and 51.3 of Decree 01/2021/ND-CP.

[6] Article 134.2 Law on Enterprises 2020.

Article written by Lawyer Phung Anh Tuan and Assistant Lawyer Nguyen Pham Hoang