PRINT THIS PAGE 2006 Update to granting stock options in China12/07/2006. Source: Fenwick & West. Fred Greguras, Tahir Naim and Jie Chen
Fenwick & West give an overview of the legal and strategic issues related to granting stock options in China, including understanding Chinese cultural views of employment and compensation, structuring option grants to comply with applicable Chinese currency controls and securities law restrictions, and the tax consequences of options. The memorandum is applicable whether the company granting the options is a US, Cayman Islands or other entity. Implementing an equity-based compensation program for employees of a foreign subsidiary is a challenging, and often costly, undertaking. Because the use of options and other equity-based compensation has only recently started in China, its laws and regulations, to the extent applicable, do not specifically address certain issues and/or are ambiguous and often incompatible with US grant making practice. To complicate the situation further, the China Securities Regulatory Commission has indicated that new regulations are forthcoming and, until final rules are issued, implementing any type of stock plan should be undertaken cautiously.
Strategy
Before implementing a compensation scheme, a company must evaluate its likely effectiveness in incentivizing and retaining employees. A company should ask "What does my Chinese employee want?" Employees in China attach importance to feeling valued and having a sense of "belonging." As a result, Chinese companies must maintain a reputation for treating their employees well or risk unwanted attrition. In the current business climate in places like Beijing and Shanghai, where competition for key employees is fierce, competitive compensation packages determine a company's ability to recruit and retain employees.
Options, to the extent they inspire loyalty and commitment and provide employees with a sense of ownership, are a potentially powerful compensation tool. A stock option, however, will not have any motivating effect to an employee who does not understand its value. Though educating employees may be one resolution to this issue, the cost and logistical burden of such undertaking my outweigh the potential benefit to the company. The current practice among the U.S. companies in China is to limit grants to senior management and key employees (in particular key employees who have worked in the U.S. and understand the value of options).
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If you have any questions about this memorandum, please
contact Fred M. Greguras (fgreguras@fenwick. com) or Tahir
Naim (tnaim@fenwick.com) of Fenwick & West LLP; or Jie
Chen (chenj@junhe.com) of the Jun He Law Offices.
Fenwick & West LLP is a law firm providing comprehensive services to high technology clients of national and international prominence. The firm has over 300 attorneys and a network of correspondent firms in many major cities of the world. Fenwick & West has offices in Palo Alto California, San Francisco California, and Washington DC. For more information please visit www.fenwick.com
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