Research On The Legal System Of The Employee Stock Ownership Plan In China

The Employee Stock Ownership Plan, initiating in America since20th century,features specificity of investors, diversity of shares getting ways and restriction onshareholders’ equity. After nearly a century of development, this plan becomes aglobal trend in corporate governance.Especially the ESOP in the United States is themost characteristic. The establishment of it makes full use of credit lever, so it is alsocalled a leveraged ESOP. Its main operation mode is to finance through the holdingfoundation to credit institutions and purchase the corporation self’s stock bysecondary market. After that, the holding foundation has a unified management of thestock, which does not transfer directly to the employee. Then the foundation repaysthe loan depending on bonuses from stock under its temporary custody. In themeanwhile, the proportion of shares is in accordance with the repayment of the loanto the employee account. The complete repayment of loan means the stock holdingsof all employee-owned.China initially introduced the system of employee stock ownership when facingthe state-owned enterprise reformation in the late1980s. It mainly aimed atovercoming corporations’ financial difficulties. Then the ESOP in China experiencedfour stages: the local exploration stage (from mid-1980to the end of1984), the policyleading stage (1985-1994), the rapid development stage(1994-1998) and thedeepening development stage (1997-2015). However, the plan has significantdifference from the foreign whether in theory basis or practice mode. And the mainpractice modes are employee direct stock ownership and ESOP, which are both facedwith inevitable legal troubles. Embodied in that under the mode of employees`directshareholding employee stock ownership disperses, it is difficult to participate incorporate governance;transfer of shares is relatively casual,and can`t achieve thepurpose of binding talents; many enterprises require employees to get the stakes onthe method of average allocation, which violates the principle of voluntaryinvestment and can not achieve the purpose of attracting following talents.Under the mode of employee group`s share holding the legal status of employee group isembarrassing;the legal relationship between employee group and the shareholdingemployees is unclear.Therefore, by research methods of historical analysis and comparison betweenforeign and China, the author considers that the trust ownership mode will be thecertain choice of the ESOP in China.The specific operation mode of employee stockownership trust is that the company that develops employee stock ownershipestablishes trust account in the name of the employee stock ownership system,anddesignates the company employees participating in this system asbeneficiaries,designates company`s management as trustees,buy and hold shares inthe employer firms for the interests of the shareholding employees, manage trustaccount employee stock ownership.Thus, it can stabilize the labor relations to ensurethe long-term implementation of employee shareholding system, and maximize theinterests of employees through professional operation under the premise of ensuringthe assets`safety in the system of employee stock ownership.In August2012, the SFC published the Interim Measures for Management of theESOP in Listed Companies(exposure draft). It introduces asset managementinstitutions as a third party participated in management of the ESOP. This step can beseen as introducing the trust mode to the ESOP formally. But its provisions are stillhighly irregular while many details need to be corrected. The measure mainly hasfour problems: Firstly, it doesn’t completely draw a clear line between the propertyownership of shareholding employees and the system,the Interim Procedures providesthat the trust property is independent from inherent properties and others of assetmanagement institutions.But the relationship between the listing corporation, theshareholding employees and the trust property is not clearly defined. Secondly, thelegal status of listed companies is not provided clearly in the ESOP, the InterimMeasures only stipulated in principle that listing corporation`s employee stockownership should be entrusted by asset management agencies,but there is no clearlegal status of the listing corporation in the trust relationship.Thirdly,the discretion ofasset management companies in the ESOP are restricted,article twenty-fourth of the"Interim Procedures" is too mechanical, not giving any discretion to the asset management corporation,and can`t play an active rule of trustee`s professionalmanagement talents.Lastly,the mandatory provision of employees’ shareholdingproportion lacks validity. the hard and fast rules of article eight of the "InterimProcedures" on employees`the proportion of investment and shareholding ignores thedifferentiating factors of investors`investment capacity.In view of these problems, the author suggests improving it from fourperspectives:clear purposes of the trust and realize the ownership, guarantee assetmanagement companies’ discretion, change the mandatory provision of shareholdingproportion and create a good trust environment.In short, when the system is designed,it should arrange realizing the shareholding employees investment interests in the firstplace.While assuming the fiduciary duty restriction, trustees are able to exercise somediscretion to the trust property in order to give full play to the advantages of the trustsystem.