ESOP ISSUANCE, KEY CONSIDERATIONS FOR ENTERPRISES

ESOP issuance is a critical tool for businesses to retain employees while simultaneously attracting investment capital. However, the issuance process is complex, requiring companies to comply with strict legal regulations and carefully evaluate their financial position and development strategy. To ensure long-term benefits and mitigate risks, businesses must thoroughly understand the key aspects before deciding to implement an ESOP.

What is ESOP issuance?

ESOP (Employee Stock Ownership Plan) involves the issuance of shares under a program designed for the employees of a company. This initiative aims to foster employee commitment and encourage long-term dedication to the organization.

Currently, the laws of Vietnam have only provided specific regulations for ESOP issuance of public joint-stock companies. It is essential to note that ESOP issued by a public company is deemed lawful only if it fully complies with the prescribed conditions and procedures.

Key considerations for public companies on ESOP issuance

Pursuant to Article 64 of Decree No. 155/2020/ND-CP, public companies issuing shares under an ESOP must meet the following conditions:

ESOP issuance plan

The company is required to develop a detailed plan for the issuance of shares under the ESOP. This plan must be approved by the General Meeting of Shareholders.

Number of shares issued

The company must adhere to the regulatory limit on the number of shares issued in each ESOP offering. This requirement is designed not only to meet state management objectives but also to ensure proper corporate governance.

Under current legal provisions, the total number of shares issued under ESOP within any 12-month period must not exceed 5% of the company’s outstanding shares.

Eligibility criteria for employees

The company must establish clear criteria and a list of eligible employees to participate in the ESOP, along with principles for allocating shares to each participant and the timeline for implementation. These provisions aim to maximize the effectiveness of the ESOP issuance.

These criteria and distribution principles must either be directly approved by the General Meeting of Shareholders.

Number of shares issued

The company must adhere to the regulatory limit on the number of shares or authorized for approval by the Board of Directors.

Sources of equity for ESOP issuance

When issuing bonus shares to employees under an ESOP, a public company must ensure sufficient equity to increase its share capital. Specific conditions include:

– The equity used for ESOP issuance is determined based on the most recent audited financial statements, certified by an approved auditing firm. These sources may include:

+ Share premium; development investment funds;

+ Undistributed post-tax profits;

+ Other reserves (if applicable) allowed for capital supplementation as prescribed by law.

– In the case of a public company acting as a parent company issuing ESOP shares from share premium, development investment funds, or other reserves, the equity used shall be based on the parent company’s standalone financial statements.

– In the case of a public company acting as a parent company issuing shares as a reward to employees from undistributed after-tax profits, the profit allocated for this purpose must not exceed the undistributed after-tax profit stated in the audited consolidated financial statements. If the profit allocated for employee rewards is lower than the undistributed after-tax profit in the consolidated financial statements but higher than that in the parent company’s standalone financial statements, the company may only proceed with the allocation after transferring profits from its subsidiaries to the parent company.

It should be noted that in cases where a company issues shares as a reward to employees, the total value of the aforementioned sources must be no less than the total increased charter capital value as approved in the plan by the General Meeting of Shareholders.

Money receiving account

The issuing organization must open a blockaded account to receive money to buy shares from employees, except in the case of issuing bonus shares to employees.

The blockade of proceeds will only end after the State Securities Commission has notified the receipt of the issuance results report.

Percentage of foreign ownership in enterprises

The issuance of shares meets the regulations on foreign ownership ratio as prescribed by law in case of issuance to employees who are foreign investors.

In addition, enterprises also need to pay attention to complying with the necessary legal procedures related to investment registration related to foreign investors (if any).

Restriction on stock transfer

Enterprises have the right to decide on the transfer restriction conditions, provided that they comply with the law on the transfer restriction period of at least 01 year from the date of completion of the issuance.

To complete ESOP issuance, enterprises need to complete all legal procedures

Fully completed legal procedures are the legal basis to ensure the legality of ESOP issuance and the capital obtained from the issuances.

Legal procedures that must be followed by public companies for ESOP issuance include internal approval; report to competent state agencies on the program and results of stock issuance; request for approval and registration of capital increase (in case required by law); information announcement according to regulations.

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