By formulating the 'Circular,' the regulator expects to better combine the interest of key technicians or key business personnel with the listed company's operation and long-term development.
Brain drain has always been a long-lasing pain point for technology SOEs.
To a large extent, the reason lies in issues around those employees whose work is central to the production and performance of the business; they cannot be participants in the stock incentive scheme of a listed SOE (‘SIS participants’), subject to the limitations in the system and mechanism.
And thus, it negatively affects both the enthusiasm of employees and the long-term growth of the companies.
Targeting this issue, in the ‘Guidelines on the mixed-ownership reform to the State-owned Enterprises (SOEs)’ (‘Guidelines’ for short) issued on November 8, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC, 国务院国资委) specifies that priority should be given to supporting high-tech enterprises – which largely rely on human capital and technological elements – in launching the employee stock ownership plan.
To take one step further, the SASAC subsequently released ‘a Circular on Doing Well in Equity and Dividend Incentive of Central Technological Enterprises’ (‘Circular’ for short) on November 11, in which they filed specific several equity incentive rules targeting the Star Market list companies under SOEs’ holdings.
The ‘Circular’ basically follows the ‘Rules Governing the Listing of Stocks on the SSE Star Market (Revised in 2019)’ that:
1. Allows key technicians or key business personnel who hold 5% or more of the company's stock to become its SIS participants;
2. Allows the price of restricted stocks granted by a listed company to its SIS participants to be lower than 50% of the fair market value.
On top of this, it also launched corresponding rules that give the green light specifically to the Star Market listed companies hold by SOEs (‘Applicable companies’ for short) in carrying out their stock incentives schemes (SIS):
Firstly, it supports the applicable companies who so far have not realized profit to implement SIS.
Secondly, increasing the proportion of shares may be granted, for the first implementation of their SIS has been increased from 1% to 3%.
Thirdly, increasing the value of shares may be granted to directors and senior management; they have uniformly increased to 40% of the total remuneration level by the time of granting.
Lastly, removing the cap that used to adjust the maximum level of actual gain to be received by the SIS participants.
Meanwhile, to protect shareholders’ rights and prevent the drain of state-owned assets, the ‘Circular’ also put forward supplementary requirements for two special situations:
1. When the grant price of restricted stock is less than 50% of the fair market price, its unlocking period should be appropriately extended;
2. When an applicable company that has not yet realized profit implements equity incentives, it should make corresponding restrictive provisions in aspects such as grant price and the take effect proportion of equity granted.
We believe that the new policies regarding SIS will provide efficient support for technology SOEs to prevent the prominent and sensitive problem of brain drain, to protect the reasonable returns of shareholders and to promote the long-term healthy development of the listed enterprises.