Stock Incentive Plans for PRC Listed Companies

There are three measures regulating stock incentive plans of the listed companies in China. On December 31 2005, the China Securities Regulatory Commission (CSRC) promulgated the Measures for the Administration of Stock Incentive Plans of Listed Companies (Trial Implementation) (CSRC Measures); on January 27 2006, the State-Owned Assets Supervision and Administration Commission (SASAC) and the Ministry of Finance (MOF) promulgated the Measures for Implementing Stock Incentive Plans of Offshore State-Holding Listed Companies (Trial Implementation) (SASAC Domestic Measures); and on September 30 2006, the SASAC and the MOF promulgated the Measures for Implementing Stock Incentive Plans of Domestic State-Holding Listed Companies (Trial Implementation) (SASAC Offshore Measures).

Three Types of Stock Incentive Plans

Stock Option Plan

Under a stock option plan, the listed company grants qualified option grantees the right to purchase a certain number of shares of the listed company in a certain period in the future at the price and conditions as provided in the stock option plan as duly approved. Many listed companies, such as Guangdong Midea Electric Appliances Co., Ltd (000527 SZ) and Shore Oil Engineering Co., Ltd (600583 SH), disclose their stock option plans.

Restricted Stock Plan

Under a restricted stock plan, the listed company grants a certain number of restricted stocks to the qualified stock grantee. Usually, the restricted stock is locked for a certain period, and in the case of a state-holding listed company, for at least two years. After this period the stock grantee may sell the restricted stock in a certain period as provided for in the restricted stock plan as duly approved. Hunan Valin Steel Tube & Wire Co., Ltd (000932 SZ) is a listed company that has adopted the restricted stock plan to incentivize its domestic senior officers.

Phantom Stock Option Plan

Under a phantom stock option plan, the listed company grants certain qualified option grantees the right to enjoy the value-added right of the fictitious stock in a certain period pursuant to the phantom stock option plan. The option grantee will not hold the stock or its voting rights after exercising the option, but will enjoy the added value of the fictitious stock. Hunan Valin Steel Tube & Wire Co., Ltd (000932 SZ) is a listed company that has adopted such a plan

Who can be a Grantee, and Other Concerns

According to the CSRC Measures, grantees may include directors, supervisors, senior executives and core technicians (business) of a listed company, and other employees as provided in the stock plan, but not independent directors. Supervisors cannot be grantees in a state-holding listed company as provided in the SASAC Domestic Measures and in the SASAC Offshore Measures.

Source of the Incentive Stock

Except for the phantom stock plan, the listed company must prepare the incentive stocks under a stock plan or a restricted stock option plan. The listed companies may issue additional shares to the grantees, or repurchase the shares from the capital market to transfer to the grantees, or may adopt other manners permitted by laws or regulations, for example, by transferring a number of stocks from existing shareholders to the grantee. However, according to the SASAC Domestic Measures, the stock cannot be transferred from a single state-owned shareholder.

Ceiling Amount of Incentive Stock

The ceiling amount of all the incentive stocks must not exceed 10% of the total stocks of a listed company, and a single grantee must not obtain more than 1% of the total stocks of a listed company unless approved by the shareholders' meeting with more than a two-thirds affirmative vote in the meeting.

Other Issues in Stock Option Plans

Exercise Price

The listed companies must fix the exercise price or determine a method to fix the exercise price when granting stock options to grantees. The exercise price must be no less than the higher of (a) the closing sales price of stock of the listed company one trading day before the disclosure of the brief of the stock incentive plan (draft); and (b) the average closing sales prices of the listed company during the 30 trading days before the disclosure of the brief of the stock incentive plan (draft).

Grant Date and Exercise Date

Usually, the date when the stock option is exercised (Exercise Date) must be at least one year after the date when the stock option is granted to the grantee (Grant Date), and the grantee must exercise the stock option within ten years after the Grant Date. In the case of a state-holding listed company, according to the SASAC Domestic Measures, the Exercise Date must be at least two years after the Grant Date and the grantee must exercise the stock option, in principal equally, within at least three years after the Exercise Date.