ESOP is also known as the employee stock ownership plan that currently Vietnamese businesses apply to encourage and retain qualified employees. However, not all enterprises are eligible to apply the ESOP policy, but this must depend on the structure, capital level, and many other conditions of the business. This article will give readers an overview of the regulations and conditions applicable by law to implement the ESOP of an enterprise. 

1. What does the ESOP term mean?

ESOP or Employee Stock Ownership Plan is the issuance of shares by a public company under the employee choice program (“Employees“). Therefore, ESOP shares are only sold to some employees in the company, namely those who have worked for a long time or have made a positive contribution to the development of the company.

At the same time, ESOP shares will be issued by the Company or sold to employees at preferential prices to reward their work but will be accompanied by limited conditions on transfer time, standards applicable to employees decided by the General Meeting of Shareholders or the Board of Directors.

2. Benefits and risks of ESOP

2.1 The Benefits of ESOP issuance

  • For employees

The release of ESOP shares will motivate and encourage the working spirit of the employees. Considering the preferential prices of ESOP shares and the rising stock prices along with the development of the business, the company’s employees will have more motivation to contribute and stick with the Company for a long time.

ESOP also increases the Employees’ responsibility to the business when they become shareholders and hold shares of the business.

  •  For enterprises

ESOP helps Enterprises to manage and operate sustainably based on key and qualified personnel.

In addition, the issuance of ESOP also reduces the pressure on capital, bonus cash flow for employees, and taxes while retaining capital to carry out reinvestment activities and expand Enterprises activities. Specifically, the Enterprises only need to use retained profits, stock surplus, or development investment funds to issue bonus shares without affecting cash expenditures.

At the same time, the number of shares of the company also increases and contributes to the increase of the charter capital of the enterprise.

2.2 Risks of ESOP

Please also note that the issuance of ESOP shares of a public company also carries certain risks, specifically as follows:

– ESOP causes stock dilution, which can affect important and strategic decisions of shareholders for the development of the business.

– The issuance of more ESOP shares will reduce the company ownership ratio of existing shareholders, along with a decrease in shareholders’ earnings per share (EPS).

– After the expiry of the conditions on the non-transfer of the ESOP shares, the employee can carry out the transfer of shares. Therefore, many stocks can be pushed onto the market and affect the stock price movement of the business.

3. ESOP only applies to joint-stock companies being public

Pursuant to decree No. 155/2020/ND-CP, the issuance of ESOP only applies to joint-stock companies that are public companies. There are no provisions guiding implementation for the form of non-public joint-stock companies.  Therefore, Vietnamese law does not prohibit joint-stock companies that are not public companies from issuing to employees non-ESOP bonus shares. Specifically, the Enterprise Law 2020 states that non-public joint-stock companies can issue shares through the form of a private placement of shares and there is no provision prohibiting employees from buying shares of enterprises in this form. Therefore, if the company wants to issue shares to employees, it can apply the form of a private placement of shares accompanied by policies and commitments to stick and long-term development with the business so that the employee becomes a shareholder of the company as a share buyer under this form.

4. ESOP issuance conditions

To issue ESOP shares, the public joint-stock company needs to meet the conditions prescribed on the plan for issuing shares, the number of shares issued, and the source of equity, specifically as follows:

  • Regarding the plan to issue ESOP shares, it must be approved by the General Meeting of Shareholders.
  • The total number of shares issued under the program within 12 months must not exceed 5% of the outstanding shares of the Company.
  • Regarding the list and standards of the participating employees, the principle of determining the number of shares distributed to employees and the corresponding implementation time, the General Meeting of Shareholders and the Board of Directors (in case of authorization) must specify these contents.
  • About equity sources:
    • If the type of stock issued is a bonus stock, the enterprise needs to meet the conditions of equity sources to increase equity capital including equity surplus; development investment fund; undistributed after-tax profits; other funds (if any) used to supplement charter capital as prescribed by law. These conditions must be based on the capital sources identified on the most recently audited financial statements;
    • If the public company is the parent company issuing shares to reward employees, it should be noted that:
    • If the source of equity is from a surplus of equity, a development investment fund, or other funds should be determined in the financial statement of the parent company.
    • If capital is determined to be an undistributed source of after-tax profit, the profit decided to be used to reward the employee must not exceed the undistributed after-tax profit on the audited consolidated financial statements;
    • If the profit decided to be used to reward the employee is lower than the undistributed after-tax profit on the company’s consolidated financial statements and higher than the undistributed after-tax profit on the parent company’s financial statements, the company may only make the distribution after transferring the profits from the subsidiaries to the parent company.
    • As for the issuance of bonus shares to employees, it must be ensured that the total value of sources specified above is not lower than the total value of equity added according to the plan approved by the General Meeting of Shareholders.
  • Regarding the period of restriction of repatriation, the issued shares are subject to a minimum transfer limit of 01 year from the date of the end of the issuance.
  • Regarding the ratio of foreign ownership, the issuance of shares meets the provisions on the ratio of foreign ownership as prescribed by law in case of issuance to employees who are foreign investors.
  • Regarding the opening of the blockade account, the issuer must open a frozen account to receive payment for the employee’s shares, except in the case of issuing bonus shares to the employee.
  • Regarding reporting obligations, ESOP stock issuers need to submit a report to the State Securities Board and publish information on the website of both the issuer and the Stock Exchange on the results of the issuance within 15 working days from the end of the issuance.

In short, ESOP is seen as an effective tool that helps build sustainable human resources from the side of the business. Nevertheless, this plan also comes with a range of risks. Therefore, when applying this plan in practice, enterprises need to keep in mind the prescribed conditions such as capital sources, issuance plans, number of issued shares, and other conditions and standards as prescribed. In addition, enterprises may only issue ESOP in case they meet the conditions of public joint-stock companies under the securities law.

The article is based on laws applicable at the time noted as above and may no longer be appropriate at the time the reader approaches this article as the applicable laws and the specific cases that the reader may wish to apply may have changed. Therefore, the article is for referencing only.


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