Problems in the recovery of ESOP shares of public companies

Vinhome Joint Stock Company acquired 370 million treasury shares with an expected value of nearly VND 13,000 billion and yes 1 Group Joint Stock Company acquired 827,650 ESOP (Employee Stock Ownership Plan) shares of employees with a value of more than VND 8 billion, applying the same legal framework on the repurchase of treasury shares, showing major inadequacies in the repurchase regulations ESOP stocks in practice. Public company treasury share buybacks, which are designed for large-scale strategic transactions, have become cumbersome and inflexible when applied to small, sporadic share buybacks from employees.

There is no separate regulation for the procedure for the recovery of ESOP shares

ESOP stocks are a strategic management tool widely used by listed companies to attract, retain and motivate key workers. The essence of an ESOP is to provide an opportunity for employees to buy the company's shares at a preferential price, which is usually much lower than the market price at the time of issuance. In order to ensure the effectiveness of the program and prevent sell-offs, the current law stipulates that ESOP shares are restricted from transfer for at least 01 year from the end of the issuance[1]. However, in reality, there are many cases where employees receive ESOP shares and then terminate the labor contract or violate discipline while the shares are still restricted from transfer. According to the ESOP statute of many companies, these individuals are obliged to sell back the shares that have been allocated to the company. The need to redeem shares in these cases is inevitable to preserve the original goal of the ESOP program, which is to reward those with long-term contributions.  

However, Vietnamese law currently does not have specific regulations on the order and procedures for recovering issued ESOP shares. This is a large legal gap, causing embarrassment for businesses. Due to the lack of specialized regulations, public companies are forced to apply general regulations on the repurchase of their own treasury shares. This leads to incompatibilities and many problems, because the nature of ESOP redemption is completely different from the strategic purpose of repurchasing treasury shares.

Public companies "borrow" regulations on the repurchase of treasury shares

In order to carry out the redemption of its own shares, including ESOP shares, public companies must comply with a complex and strict process specified in the Law on Enterprises, the Law on Securities and related guiding documents.

From conditions and authority to approval

As a rule, the repurchase of shares must be approved by the company's competent authority. Specifically, if the number of repurchased shares exceeds 10% of the total issued shares, this decision must be approved by the General Meeting of Shareholders. In case of acquisition of not more than 10% of the total number of shares in every 12 months, the Board of Directors has the authority to approve.

In terms of capital sources, the company must have sufficient capital to repurchase treasury shares from lawful sources such as capital surpluses, retained profits, or other prescribed sources. This source of funding must be substantiated by the most recent audited financial statements. The company is not allowed to repurchase shares in certain circumstances, such as being in business at a loss, having overdue debts, or in the process of offering new shares to raise additional capital.

To complicated and lengthy procedures

The process of redemption of treasury shares is a series of sequential steps that are required to strictly comply with the time and content of the report: From step (1)  Report to the SSC. The company must prepare and submit a report on share repurchase to the SSC. This dossier includes the acquisition report, resolution of the General Meeting of Shareholders or the Board of Directors, the acquisition plan, audited financial statements and documents proving sufficient capital.  Next, the SSC will receive and review the dossier. If the dossier is incomplete or invalid, the SSC will request the company to supplement and explain within 07 working days. After receiving the official letter notifying the complete dossier from the SSC, the company must disclose public information in the media at least 07 working days before starting trading.   To (2) Make a transaction. The company makes the redemption transaction within the published period, but not more than 30 days from the date of commencement. and (3) Report on performance results. Within 10 working days after the closing of the transaction, the company must submit a report on the results and disclose the information to the public.  

In addition, an important obligation after the completion of the share redemption is to carry out the procedure for reducing the charter capital. However, in the latest adjustment of the Securities Law stipulating the procedure for the redemption of ESOP shares, the company does not have to carry out procedures for reducing the charter capital with the number of shares the company repurchases[2].

Obstacles when applying the procedure for buying treasury shares for ESOP stocks

The application of the general legal framework on the repurchase of treasury shares for the recovery of ESOP shares by employees reveals many inadequacies, creating significant barriers for businesses.

Extended implementation time

The treasury share redemption process is designed to manage large transactions, which can impact the market. As a result, the process is lengthy, with the prescribed minimum timelines of 14 working days and in practice often lasting more than 30 days. Meanwhile, the revocation of ESOP shares often arises unexpectedly when an employee quits their job and needs to be handled quickly to avoid disputes or stock price fluctuations. Delays due to this administrative process can lose the value of the stock or further complicate the settlement of workers' rights.

Moreover, the size of these transactions is completely different. A redemption of treasury shares can reach hundreds of billions of VND, even trillions of VND as in the case of Vinhomes, while the recovery of ESOP shares of an individual can only be a few tens of millions of VND, and arises very frequently. Applying the same complex and resource-intensive process to small transactions is both administratively and financially inefficient.

Financial risks

ESOP shares are usually issued at a preferential price, much lower than the market price. If the share price in the market drops sharply during the transfer restriction period, the company may have to buy back at the price committed in the ESOP regulations, which may be higher than the market price at that time. This causes financial losses to the company and can give rise to conflicts between the interests of the company and the interests of employees. In particular, there is a contradiction in arranging time and capital to buy back these shares for employees[3]. The use of capital to buy back shares, even in small amounts, means that the resources are not used to invest in business operations, improve facilities or other development projects.  

Masan – a listed company that frequently implements ESOP policies to incentivize employees. Source: Financial and Monetary Market Review.

What is an effective solution to solve these problems?

To overcome the problems of the procedure for repurchasing treasury shares, some public companies have applied an innovative solution, which is to authorize the grassroots Trade Union to carry out the repurchase of ESOP shares of employees who quit their jobs. The legal basis for this option is usually recorded in the ESOP regulation itself or the resolution of the General Meeting of Shareholders/Board of Directors. These documents allow the Trade Union, as the organization representing workers, to have the right to withdraw or repurchase the shares that have been issued to employees in the program. This transfer will then be carried out according to the usual transfer of ownership process, rather than the complicated process of redemption of treasury shares.

This model helps businesses avoid the complicated and lengthy processes of the SSC. Transactions can take place quickly, in accordance with the nature of dealing with cases of unscheduled leave of absence. It can be seen that compared to implementing a full-fledged repurchase of treasury shares, this model saves significant administrative costs, time and human resources.

However, Vietnamese law does not have clear regulations on the role of trade unions in share buybacks. Although in some cases, the SSC has issued written approval[4] for the transfer of ownership, this is a case-by-case approval, not a solid legal basis for all businesses. In addition, these transactions may give rise to personal income tax obligations to employees. According to current regulations, income from securities transfer is subject to a tax rate of 0.1% on the transfer price. In addition, there may be a personal income tax risk on the price difference, depending on how the transaction is priced and the Union's funding.  

In some cases, the use of trade unions to recover shares may be seen by other shareholders as a way to circumvent the law, lack of transparency, raising doubts about the integrity of the management. This can reduce investor confidence, especially when they realize that management may use administrative "tips" to profit, causing damage to the company and shareholders.

Note to public companies

To proactively reduce risks and problems, businesses need to apply strategic solutions. Right from the development of the ESOP program, it is necessary to make a detailed and transparent regulation and be approved by the General Meeting of Shareholders. This regulation must clearly define the rights and obligations of employees when leaving the company, as well as the method of handling shares during the transfer restriction period. If choosing the option of repurchasing official treasury shares, it is necessary to have close coordination between departments to ensure that the dossier is complete, valid and complies with the information disclosure deadline. In case, the company uses the option of using a trade union to receive the transfer of ESOP shares, although this is an effective situational solution to overcome the troubles of the procedure for buying treasury shares. However, businesses need to carefully consider legal and tax aspects before applying this model. Consultation with experts and specific written approval from the SSC for each case will be a way to help reduce legal risks significantly.

Recommendations to management agencies

In order to create a transparent and convenient legal corridor for businesses, state management agencies need to consider: (1) Complete the legal framework.The  SSC and the Ministry of Finance should soon issue specialized guiding documents for the recovery of ESOP shares. These documents should clearly distinguish between the redemption of ESOP shares and the repurchase of treasury shares in general. (2) Simplify administrative procedures. The development of a more streamlined and flexible reporting and information disclosure process for small-scale ESOP share buybacks that do not have a major impact on the company's charter capital and ownership structure is necessary to help public companies operate and do business more efficiently in the coming time.

It can be seen that the problem for public companies when recovering ESOP shares of employees before the main deadline lies in the lack of specialized regulations, forcing enterprises to apply general procedures that are not suitable for the nature of the ESOP program. Although innovative solutions such as having the Trade Union acquired have emerged and are practically accepted, they still pose risks that the company may bear. Therefore, public companies are looking forward to an official guideline/regulation from the regulator to solve a problem that occurs very often at the enterprise.