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Sichuan Pilots Plan for SOEs Employee Stock Ownership

  Recently, the Sichuan Provincial State-owned Assets Supervision and Administration Commission (SASAC), Department of Finance and the Securities Regulatory Commission jointly issuedthe Sichuan Provincial Guidelines on Employee Stock Ownership Plan (ESOP) Pilot in State-Holding Enterprises. It clarifies that the first batch of pilots are to be carried out selectively in five to ten state-holding enterprises. And those with a high proportion of talent capital and technical contribution, such as system-transformed scientific research institutions, high-tech enterprises, scientific and technological service enterprises, will be supported in priority to carry out pilot. This Guideline marks the official launch of Sichuan provincial ESOP Pilot in state holding enterprises.
The Guideline points out that the pilot enterprises have to possess four qualifications. First, company’s main business should be in fully competitive industries and fields. Second, the equity structure of the company should reasonable, that is, non-public capital should make up a certain proportion of shares which would enable those non-public capital shareholders recommend at least one director into the board of directors. Third, the company should have a sane corporate governance structure and a market-oriented labor and personnel distribution system and performance evaluation system; so that a market mechanism can be formed where adjustment on executives, employment and revenue can easily work out. Fourth, more than 90% of the company's revenue and profit should come from the external market of its enterprise group. The Guideline also makes clear that two types of enterprises are not allowed to carry out the pilot. The first type are Provincial Level I enterprises and City (State) Level I enterprises. The second type are those enterprises which violate the relevant provisions of the SOEs’ ESOP and fail to complete the rectification as required.

  Which employees can participate in the shareholding? How much can they hold? The relevant person in charge has expressed that the Guideline clarifies the conditions of ESOP in 16 aspects, such as the proportion, price, investment methods, equity transfer, etc. He promises that the proportion of employee ownership will not follow the principle of equalitarianism and the profit distribution will not stick to any form of fallback commitment.

  The employeeswith access to shareholding shall be the scientific research personnel, management personnel and business backbones who have signed labor contracts with the company, work in key positions and have direct or great influence on the business performance and sustaining development of the company. The leaders of SOEs appointed by the Party and government shall not hold any stock. If at least one immediate family works in the same company, only one person shall hold the stock.

  Under the premise that the holding of state-owned capital is guaranteed, qualified employees can voluntarily buy stocks by means of expanding capital and stocks and bringing in new capital. The proportion of employee holding should be tied to the working performance, rather than to be guided by equalitarianism. According to the guidelines, in principle employees should hold less than 30 percent combined of the total equity, with each individual employee owning no more than 1 percent of the total. After the implementation of ESOP, the state should hold at least 34 percent of a pilot company's total equity to ensure state-owned status.

  ESOP pilot will also take risk-sharing mechanism. The Guideline points out that profit distribution plan and dividend rate should be determined by the general meeting of shareholders. The stock-holding employees assume personal responsibility for profit and loss and have equal rights with other investors, sharing the market competition risk with the enterprise. The state-owned enterprises and the shareholders shall not promise annual dividend return or set minimum guarantee repurchase clause.

  "Conditions permitting, the pilot reform will be carried out in enterprises one by one. The first pilot list is expected to be officially finalized in the second half of this year."." Relevant person in charge said.

  The Guideline also clarifies that Sichuan province will make a phased review in the end of 2018, and scope of pilot may be scaled up depending on different circumstances.


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