legal framework
Under Hong Kong law, a company's equity incentive plan involves a number of different legal issues. In summary, at the legal level, the following laws are most likely to be involved:
1. Company Law
The establishment of an equity incentive plan may involve the issuance of new shares of the company as incentive equity. The issuance of new company shares needs to follow the procedures stipulated in the Company Regulations and the company's articles of association. For example, it needs to be approved by the company's shareholders' meeting before the board of directors makes a resolution.
2. Contract Law
After the arrangement between the company and the employees regarding the grant of stock options, stock subscription rights and other plans takes effect, it constitutes a contractual arrangement between the company and the employees, and is subject to the terms of the contract (and the terms of stock options, restricted stocks, stock appreciation rights, etc. ) constraints.
3. Labor Law
The benefits received by employees as a result of equity incentive plans constitute part of their labor remuneration and income and are protected and restricted by labor laws.
4. Tax laws
The benefits received by employees due to equity incentive plans also need to be reported to the tax bureau as part of labor remuneration in the employee's annual salary tax return. The company also needs to declare to the tax bureau as labor remuneration paid to employees.
5. Trust law
Many equity incentive plans (especially restricted stock type equity incentive plans) involve transferring the equity used for incentives to be held by a trustee on behalf of the trustee. The trustee who holds the incentive stock serves as the legal equity holder of the stock, and the company or employee who established the equity incentive plan (after exercise) becomes the substantial equity holder of the stock. This depends on arrangements under trust law.
6. Anti-discrimination laws
Of course, equity incentive plans can set different conditions for all or part of the employees to participate and obtain benefits, but there must be no discrimination based on gender, disability, or race. In this regard, Hong Kong has different legal regulations such as the Sex Discrimination Ordinance, and the Equal Opportunities Commission is responsible for implementation.
7. Laws related to privacy protection
Implementing an employee equity incentive plan will inevitably collect some personal information of employees. This personal privacy information is protected by laws on personal privacy protection and must be collected and stored in accordance with legal regulations.
8. Listing Regulations
For listed companies, Chapter 17 of the Main Board Listing Rules and Chapter 23 of the GEM Listing Rules have relevant provisions on stock options, which listed companies need to comply with.
Common types of equity incentive plans
In practice, companies can adopt different employee equity incentive plans. Different types of employee equity incentive plans have different characteristics, and companies can choose a suitable plan according to their own needs. The following table lists two common equity incentive plans in Hong Kong: stock options and restricted stocks.
| category | Stock options (Option) | Restricted Shares |
|---|---|---|
| Incentive object | Directors, senior executives, key employees, etc. | Directors, senior executives, key employees, etc. |
| The subject of the award | options | restricted stock |
| payment of consideration | Donate or paid | Donate or paid |
| Which company's shares? | Hong Kong company or overseas parent company | Hong Kong company or overseas parent company |
| grant document | Option Plan; Option Agreement or Option Award Grant Notice | Restricted Stock Plan; Restricted Stock Agreement or Restricted Stock Award Notice |
| stock source | Existing stocks or newly issued stocks | Existing stocks or newly issued stocks |
| Exercise conditions | The exercise conditions for options are stipulated in the grant document, which often include: length of employment, performance, etc. | The conditions for converting restricted stock into unrestricted stock are stipulated in the grant document, which often include: length of employment, performance, etc. |
In addition to stock options and restricted stock, other common forms of employee incentive plans include restricted stock unit plans, deferred cash awards, virtual equity plans, stock appreciation rights plans, etc.
Conclusion
Hong Kong companies need to consider many legal issues when setting up equity incentive plans, including company law, contract law, labor law, tax law, trust law, anti-discrimination law, privacy protection law, listing regulations, etc. Different types of equity incentive plans have different characteristics, and the company should choose a suitable plan based on the actual situation.
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