Recently, several joint-stock companies (“JSCs”) that are not public JSCs (called ‘non-public JSCs’ in this article) want to pay bonuses by shares or issue shares at a lower price to employees under the form of ESOP to recognize employees’ contributions and encourage them in their work. However, not all companies clearly understand the application of ESOP to non-public JSCs.

In this article, BLawyers Vietnam presents 03 issues relating to the issuance of shares and share-based bonuses for employees in non-public JSCs pursuant to the prevailing laws of Vietnam.

1. Has a clear legal ground for an Employee Stock Ownership Plan (ESOP) been applied to share-based bonuses for employees in non-public JSCs?

Not yet. The prevailing Vietnamese laws only provide guidance on the application of ESOP applicable to public companies and listed companies under the Law on Securities 2019, Decree No. 155/2020/ ND-CP, and Circular No. 118/2020/TT-BTC.

For JSCs that are non-public JSCs and listed JSCs, the prevailing Vietnamese law has no separate regulation to directly govern the implementation of ESOP to employees. Therefore, the way that non-public JSCs apply the above-mentioned legal documents to pay share-based bonus to employees is not appropriate.

2. Is there any other way for non-public JSCs to pay bonuses as shares to employees under the prevailing Law on Enterprises?

Yes, there is. Non-public JSCs often pay bonuses by shares or issue shares at preferential prices to employees through the form of private placement of shares to employees in accordance with the Law on Enterprises. Accordingly, the company issues several new shares and offers to sell those shares to employees at a price lower than the market price or par value of shares.

When offering private placement of shares to employees, enterprises need to note the following issues:

1. 1. 1. Decision authority: The company’s Board of Management has the right to propose the type of shares and the total number of shares to be offered for sale; and to determine the sale price of shares. The General Meeting of Shareholders is the competent authority to decide on the type of shares and the total number of shares of each type that may be offered for sale.
      2. Existing shareholders’ preemptive right to purchase shares: Purchasing the private placement of shares by employees may be hindered by the preemptive right to purchase shares of existing shareholders. Under the Law on Enterprise, existing shareholders of the company have the priority right to purchase shares in proportion to their share ownership ratio when the company offers the private placement of shares to other organizations and individuals. Therefore, the private placement of shares for employees to own shares requires the consent of the company’s existing shareholders. When existing shareholders refuse to purchase, the company has the right to sell to its employees.
      3. When issuing new shares for employees to buy, the company’s charter capital will increase, and the company must conduct procedures to register the increase in charter capital in accordance with laws within 10 days from the date of completing the sale of shares. At the same time, an increase in the number of shares will reduce the share ownership ratio of existing shareholders.
      4. Subject to the sale price of shares and the source of capital determined by the company to issue share-based bonuses and low-priced preference shares to employees, the company must accurately account for this share-based bonuses’ transaction in accordance with the laws on accounting. Therefore, the company must clearly know about the accounting profession when issuing shares with a preferential price to employees.
      5. Technically, under the Law on Enterprise, each share under the same class provides its shareholder with equal rights, obligations, and benefits. However, when issuing share-based bonuses to employees, if the company wants to impose conditions on the limit on transfer, the resale of shares to the company, etc., the company needs to consider signing mutual agreements to bind the employees accordingly.

3. Can non-public JSCs pay bonuses as shares to employees through transactions of share transfers or share donations?

Yes, they can. In addition to issuing new shares to reward or sell at a low price to employees as mentioned in Item 2 above, employees can own the company’s shares by receiving shares transferred at low-price or donated by existing shareholders.

Since shares currently are private assets of existing shareholders, the transfer or donation of their shares to employees shall not increase the company’s charter capital and shall reduce the share ownership ratio of such existing shareholders. In addition, this activity shall not affect the company’s capital or increase the company’s accounting operations.

Employees will become the company’s shareholders from the time their information is fully recorded in the shareholder registration book. The Company shall be responsible for carrying out the procedures as prescribed by law to record new shareholders.

It is worth noting that not all companies are willing to offer share-based bonuses to employees through donating and transferring shares at lower prices from shares of existing shareholders since it causes “dilution” of those shareholders’ shares.

The above are notable issues related to the application of ESOP to non-public JSCs that enterprises need to learn about before implementing. However, this article is limited under the prevailing Law on Enterprises’ regulations, and we have not mentioned tax obligations of relevant parties.

If you have any questions about the above content, please email BLawyers Vietnam to consult@blawyersvn.com. BLawyers Vietnam would be happy to hear from you!

Date: 20 June 2023

Writers: Trinh Nguyen and Uyen Tran