“ESOP stands for Employee Stock Ownership Plan. Lately, ESOP has been a popular method among many enterprises to retain elite and key workers. In essence, ESOP is a corporate financial strategy where shares are used to reward employees, or resell to employees at a preferential price. The purpose of this strategy is to align employees’ interests with those of shareholders and the company, by giving them ownership of shares in the company.”
Laws in Vietnam only stipulate the legal framework for ESOP in public companies. According to the ‘Law on Securities 2019’, a joint stock company in one of the following cases may register with the State Securities Commission (SSC) to be a public company:
According to the provisions of ‘Decree 155/2020/ND-CP’, the conditions for a public company to issue shares under an employee stock option plan (ESOP) are prescribed as follows:
Public companies shall send reports about ESOP to State Securities Commission. The SSC, within 07 working days shall respond about the approval of ESOP. Upon approval, a notification is published on the websites of the issuer and the Stock Exchange at least seven working days before the end of the issuance.
Within 15 days from the last day of issuance (the last day for collecting payments for the shares from the employees, or the date determined by the issuer to issue bonus shares to its employees), the issuer shall send reports on such issuance to SSC and publish it on the website of the issuer and stock exchange.
Current laws do not stipulate specific conditions for employees to participate in ESOP. The selection and criteria for employees to participate in ESOP depend on the decision of each company. Therefore, enterprises have the right to develop criteria to select workers eligible to participate in ESOP.
A public company must meet certain conditions and follow the statutory process to issue an ESOP. Whereas a joint stock company which is not a public company can carry out the usual procedures for increasing charter capital in accordance with the ‘Law on Enterprises’ if it wants to create an ESOP. The date on which the ESOP process is completed is the date of receipt of full payment for share purchase (the date of completion of the charter capital increase) or the date of transfer of share title as approved by the GMS.
ESOP is an effective financial tool for enterprises. It is seen as a reward which helps employees in aligning themselves with the company’s interests to contribute more to the business in the future. Issuance of ESOP helps businesses retain elite and core employees. In addition, by issuing bonus ESOP shares, enterprises can do away with cash bonuses and instead use the retained earnings to issue shares.
Along with the benefits of ESOP as explained above, some risks may also arise. This is because disputes related to interests of shareholders or employees of the company on the issuance of ESOP occur generally.
According to current Law on enterprises, unless otherwise regulated in the company’s charter, resolutions related to the issuance of ESOPs must be approved by at least 65% of the total votes of all shareholders attending the meeting. Therefore, it will be difficult for the minority shareholders to oppose the issuance of the ESOP even though it could dilute their share ownership and reduce their voting rights in the company. As a result, ESOP acts as a tool for top managers to impact the interests of minority investors.
In addition, the legal right of enterprises to freely set criteria and select employees who are entitled to ESOPs leads to unclear selection mechanisms, internal conflicts, and diluted share ownership and poses risk of stock price decline.
In general, ESOP is an effective financial strategy for business as well as employees. However, enterprises need to balance the interests of shareholders and employees while issuing ESOPs. Businesses should take advantage of the benefits of ESOPs to promote their interests and bring good results.
Date of writing: 23rd September 2021
This article is based on the current laws at the above recorded time and may no longer be relevant at the time readers access this article due to changes in applicable law and specific cases which the readers want to apply. Therefore, this article is for reference only.