In modern society, talents have become an essential resource for the development of enterprises. They have played an increasingly important role in the market competition. Many companies implement stock options incentive systems to attract and retain talents. However, there are many problems in the current stock options incentive system of enterprises, which limit the effectiveness of the system and even bring potential dangers to the enterprises. Based on my own experience, I analyze the legal issues which involved in stock options disputes, and puts forward corresponding practical suggestions, hoping to bring useful enlightenment to readers.

I. Overview of Stock Options

a、The concept of stock options

Stock options incentives refer to the rights granted by a listed company or an unlisted company to purchase a certain number of shares (or stocks) of the company at a predetermined price and conditions in the future. When the stock market price is higher than the exercise price on the exercise date, the potential holder can buy a certain amount of company stock at a low price agreed in advance. If the holder sells for a second time, the return is the difference between the stock market price and the exercise price; the holder can also have the stock itself, that is, he or she can enjoy the same shareholders' rights as the common shareholders. The core idea is to share the company's profits and risks with the holders so that they have the incentive to operate the company under the principle of maximizing shareholders' interests and reduce or eliminate short-term behavior. Stock options are essentially a bunch of selective rights. The right holder can choose to purchase a specific number of shares of a specific company at a specific point in time and a certain price, regardless of the current market value of the stock. According to the purchase price previously agreed by the two parties, the holders have the right to acquire a certain number of shares after exercising their rights. The right holder can choose to exercise the right or not to exercise the right.

Ⅱ. The nature of stock options

For the issue of whether stock options are remuneration for labor remuneration, there are two points of view in practice. One view is that stock options are also labor remuneration. The typical provision in Article 9 of the "Tianjin Economic and Technological Development Zone Labor Management Regulations" revised in 2000 regulated that "Employers pay money to senior management, senior professional and technical personnel in addition to wages, distribution methods such as annual salary, profit sharing, and equity options can also be adopted. "This is an affirmative rule that treats stock options as labor remuneration. At the same time, there is also a contrary view that stock options are not labor remuneration, and the basis is that Article 50 of the Labor Law stipulates: "Salary shall be paid to the laborer in monetary form on a monthly basis." Explanation of Several Articles of the Labor Law (Labor Office [1994] No. 289) also clearly states: "The" currency form "in this article excludes the issuance of physical objects, the issuance of securities, etc."

We believe that stock options are different from stocks. It is only a right to purchase a certain number of shares; it is uncertain whether the right holder will exercise the right when it expires, and whether this right can ultimately give the grantee a positive incentive is also uncertain. Relevant statistics show that affected by the economic situation recently, many stock options plans were forced to terminate without being finally implemented. Why was the implementation terminated? It is because the price of stocks issued on the open market has fallen sharply, even below the exercise price of stock options. In this case, if stock options are regarded as a kind of labor remuneration, it means that the employer can pay workers a negative amount of labor remuneration, which is obviously inconsistent with the current legal regulations and legal practices. From this perspective, we believe that stock options are not labor remuneration.

The reason to discuss whether stock options are remuneration for labor is that defining them in different way will lead to different judgment from the court. If stock options are labor remuneration, the disputes arising from stock options will be handled by the labor disputes, that is, arbitration, first instance and then second instance. If stock options are not considered to be labor remuneration, once dispute happened, the court will deal with it in accordance with the contract law. In the contract dispute, the parties can choose to apply the law and can choose the jurisdiction.

Ⅲ. Implementation steps of stock options incentive plan

In practice, it is mainly divided into four periods: Grant, Vest, Exercise and Cash-in.

Grant

A certain number of stock options are awarded to the specific personnel by the plan executor, which is stipulated in the stock options incentive plan, or the grant agreement. This is the first period of execution of the incentive plan.

Vest

This is, namely, the maturation process of the stock options. Normally, stock options are not granted to the grantee once and for all, which means employee may be awarded one-fifth or one-tenth of the equities each year within five- or ten-years period in ways to obtain the appropriate equity.

Exercise

After being awarded the entire stock options, and the fulfillment of time nodes and conditions (for example, going public or acquisition) of exercise regulated in the incentive plan, the grantee is accessible to exercise his rights on it. Grantee can purchase specific number of equities at an agreed price in advance. Afterwards, these shares could be registered to the grantee (or a designated third party), after the complication of stocks payment, individual income tax payment and all relevant formalities.

Cash-in

Grantee can either cash in or hold his registered stocks. The equities can be sold out on the stock market in public, or cash in through acquisition by the company or other major shareholders. Besides, grantee could also wait for better price or good point of time to transfer his equities, or just hold stocks in long-term as to receive his dividends.

Ⅳ.How to deal with stock options when employees leave the company

When employees leave the company, their stock options are mainly dealt with in terms of the processing of unvested stock options and the processing of vested stock options.

Unvested stock options usually expire naturally, and common terms are as follows: When the options owner terminates the service for a certain reason, unless the administrator makes another decision, the options' right to exercise shall immediately terminate with the termination of the continuous service.

For vested and unexercised stock options, there are usually five methods to deal with them-complete deprivation, repurchase according to net assets, repurchase according to original capital contribution, repurchase at fair price, and retain. It should be noted that these five methods can be applied only when they are clearly stipulated in the options agreement or specified in the options plan. At the same time, the specific treatment methods corresponding to the behavior performance of employees during or after leaving the office are listed as far as possible. Of course, no matter how the options agreement is agreed upon, the company can communicate with the employees individually when they leave the company, and make it clear how to deal with stock options through other agreed methods.

a. Completely deprived

Complete deprivation is generally treated as a punitive measure against employees who have deliberately violated discipline or committed gross negligence. It is usually expressed in an options plan or options agreement as follows: If share holder acts as following：(i) harm the company or its affiliates; (ii) infidelity, deliberate misconduct, or a material breach of an agreement with the company or its affiliate; or (iii) committing an act involving infidelity, abandonment, or physical or emotional affection to anyone, unless the administrator makes another decision, the options holder's right to exercise the options shall be terminated immediately. At the same time, the company or the manager has the right to repurchase the shares purchased by the authorized person based on the exercise of options at a discount price determined by him or herself; or to claim the relevant income of the authorized person.

b. Repurchase by net assets

This method is similar to the first complete deprivation. Because the net assets of startups are often much lower than the market price, sometimes even lower than the original capital (because startups may continue to loss). This approach is generally adopted for employee who has a significant conflicting interest after leaving the company (such as employees switching to a competitor company or starting a business by themselves) or employees who are seriously unable to fulfill their job requirements during their employment.

c. Repurchase based on the original investment

Repurchasing the original capital based on the original price, this is a fair solution, which is equivalent to returning the capital invested by the employee, but only requires employee to give up the investment income. The principal can be calculated based on the difference between the expected salary and the actual salary, and the valuation of additional resources. This method is suitable for core employees who are "blandly breaking up and forgetting each other."

d. Repurchase at market fair prices

This method is much better way for the employee. It is a relatively compromised scheme, and makes both parties feel happy. Before the company's listing, the market fair price can generally be calculated using the price of the previous round of financing, plus a discount rate (because financing is generally capital increase, the valuation of capital increase is higher than buying old stocks). For example, the subsequent valuation is 10 million yuan, thus the fair price can be calculated at about 8 million yuan.

e. Retain stock options benefits

Retain the benefits of stock options is the best way for the employee. When exercising time is mature, employees can purchase certain stocks by exercising their rights. If the company feels that the departing employee is still of great help to the company, and the employee also promises to continue to provide resources to the company after leaving, then the employee equity or options can be converted into the equity of the general investor (options may require money to subscribe or discount). This method is usually applicable for important core employees who can continue to contribute after leaving the company or the company is on the eve of major capital actions (such as listing) and does not want to have equity changes or equity disputes.

Ⅴ. How to link stock options with grant employee additional obligations

Generally speaking, when an employee is granted a stock options, it means that he has received an additional reward. According to the basic principle of equal rights and obligations, if the employee receives such an incentive, he must pay a certain consideration accordingly. In practice, options plan implementers need to consider how to associate employee stock options with additional obligations.

a. How to link stock options with agreements on term of service

How to correlate the above two can refer to the Case of Contract Disputes between Cao Lin and Shenzhen Fuanna Househould Articles Co., Ltd.

The basic facts were: Cao Lin voluntarily subscribed to Fuanna Company 's restricted stock in accordance with the Stock Incentive Plan launched by the Company. After that, the Company decided to terminate the Stock Incentive Plan and converted the restricted stock held by Cao Lin into unrestricted common stock on the basis that Cao Lin issued a Commitment Letter (to voluntarily serve the Company for a certain number of years). After conversion, Cao Lin sold the stock and made profits. And then she resigned before the end of the agreement. Fuanna Company sued Cao Lin for liquidated damages.

The court held that the Commitment Letter is a continuation of the Stock Incentive Plan and should be binding on employees, and employees should pay liquidated damages to the company where the employee issues a commitment letter but fails to fulfill the agreed obligations and leaves before the end of the agreed term. Although there is a labor contract relationship between the two parties, the labor contract relationship between the two parties and the equity relationship formed by employees' purchase of the company's restricted stock are two independent, different legal relationships with different rights and obligations. Therefore, the contract law, rather than the labor contract law, should be applied in this case to judge the validity of the Commitment Letter.

From this case we can conclude that if employees receive additional rewards such as options during their employment, the company and employees can reach agreement on term of service in order to enhance the stability of the labor relationship. We recommended that the company can draft a separate agreement from the labor contract in case of the case handled as labor disputes, which may negate the legitimacy of the term of service. Otherwise, the correlation between monetary rewards and term of service is being recognized by judicial authorities in Beijing and other places, which means that even if there is no separate agreement, the company's claim may be supported.

b. How to link stock options with the liability for breach of contract of non-competition

How to correlate the above two can be inspired by the case " Competition Restriction

Dispute between Tencent Technology (Shanghai) Co., Ltd. (hereinafter referred to as

Tencent Shanghai) and Xu Zhenhua ".

The basic merits of the case were that Xu Zhenhua signed “Confidentiality and Non-Competitive Commitment Agreement” with Tencent Shanghai during his tenure, which stipulates “Xu will make a confidentiality and non-competition commitment, and the parent company of Tencent Shanghai will grant Xu restricted stocks as consideration. If Xu fails to perform his contractual obligations, he shall bear the liability for breach of contract and have no right to exercise options of the restricted shares that have been granted but not yet exercised. For the restricted shares whose options have been exercised, Tencent Shanghai has recourse of the proceeds from them. If the amount of proceeds is difficult to determine, it is calculated based on the market value of the stock on the day when legal actions are taken, unless Xu can prove the actual proceeds mentioned above.” After Xu resigned from Tencent Shanghai, he started his own horizontal competition business. Tencent Shanghai then initiated arbitration proceedings and demanded that Xu return the relevant proceeds.

The court finally determined that the parties signed a valid and effective agreement on the rights granted to the restricted stock and the liability for breach of contract. Xu also obtained the restricted stock based on the agreement. Now Xu has a breach of contract, and he should bear the liability for breach of contract according to the agreement. Due to Xu's failure to provide transaction records, it is difficult to determine the amount of proceeds, so it should be calculated based on the market value of the stock on the day Tencent Shanghai took legal actions. To sum up, the court of second instance ruled that Xu paid Tencent Shanghai RMB 19,403,333.

From this case, it is suggested that in the chapter “the liability for breach of contract” of the competition restriction agreement signed by the domestic company and the laborers, it should stipulate the content of returning the options or proceeds of the restricted stock granted by the parent company, and the remuneration for breach of contract should be increased. It is also possible to add related clauses to protect the options granting company and its affiliated companies in the options agreement of offshore companies, such as restrictions on competition and prohibition of solicitation.

C. How to link stock options with competitive restrictions

How to correlate the above two can be inspired by the “Labor Dispute of Tencent Digital (Tianjin) Co., Ltd. (hereinafter referred to as Tencent Tianjin) and Liu Chunning”.

The basic facts of the case are that Liu Chunning and Tencent Tianjin signed a "Confidentiality and Non-Competitive Commitment Agreement", which stipulates that given that Liu Chunning has learned about the important business secrets of Party A's Tencent Tianjin and its affiliated companies, employees make confidentiality and non-competition Commitment, as the consideration for Party A's parent company authorizing its stock options. Later employees resigned from the company and engaged in violations of the restrictions on competition. Tencent Tianjin required them to pay a penalty for competition restrictions and continue to perform the Agreement on Confidentiality and Non-Competitive Commitments. The main reason for Liu Chunning's defense is that options are remuneration for labor, not remuneration for competition restrictions, so they do not need to fulfill the Confidentiality and Non-Competitive Commitment Agreement.

The court finally found that from the agreement, the employee's options income has multiple attributes such as equity incentives, remuneration for competition restrictions, and penalty for violation of competition restrictions. It does not belong to the consideration of labor activities mandated by the labor law, which is The wage component in the legal sense. In addition, before the parties disputed the agreement, the employees had already received stock returns that were far higher than the legal limit for competition remuneration. Therefore, the view that the agreement held by the employee is invalid or should be terminated cannot be established, and both parties should continue to perform.

The solution suggestion from this case is that in the competition restriction agreement signed between the domestic company and the employee, the options income given to the employee by the overseas company can be used as remuneration for the competition restriction, thereby reducing the burden on the domestic company; In the options agreement, the performance of employees' restrictions on overseas and domestic companies as a prerequisite for obtaining options income is restricted, thereby restricting the behavior of employees after leaving the company.

d. How to link stock options with disciplinary actions such as fraud and conflict of interest

How to correlate the above two can be inspired by “The company-related dispute between Lin and Alibaba.”

The basic facts of case are that Lin was an Alibaba employee who joined the company in 2001. During his tenure, he invested with others to establish a company and signed a contract with an Alibaba Group affiliated company. The rules and regulations agreed in China shall be observed. Thereafter, Alibaba Group's 15,000 ordinary rights held by Lin that had completed the exercise procedures were recovered by Alibaba. Hou Lin filed a lawsuit with the Binjiang District People's Court of Hangzhou City, asking Alibaba to deliver 15,000 shares of stock certificates and go through relevant registration procedures.

The court finally found that Lin, as an employee of Alibaba, invested in establishing a company with others and signed a contract with an Alibaba Group affiliated company during his tenure, but did not disclose it to the company, which seriously violated the Alibaba Group Business Conduct Code. The provisions on conflicts of interest constitute (i) in specific grounds, that is, a serious breach of any agreement or agreement between the "Participant" and the "Company" and any of its "subsidiaries", and (ii) in connection with their appointment or employment with If any material facts related to the "service provider" make false statements or omit any of these material facts, Alibaba has reason to claim that it will not go through the relevant equity registration and other transfer procedures, so the court did not support Lin's claim.

The handling suggestion drawn from this case is that, compared with the content of the rules and regulations of the employer, the adjudication agency has more respect for the autonomy of the parties in the options agreement, and the company should fully design the content of the options plan to protect their interests.