With over 40 years of experience, and providing services to 250 companies across Asia, we are committed to sharing insights into many aspects of share plans. Our experts will answer your questions, from multi-jurisdictional share plan management, financial reporting, trust set-up and management and more.
Cliff Huang
Vice President,
Computershare Plan Managers Asia
How does an ESPP affect my accounting and reporting requirements?
Understanding accounting and financial reporting obligations for different plan types is critical to ensuring regulatory compliance. Unlike long-term incentive plans (LTIs), an employee stock purchase plan (ESPP) is a program that is more complicated in terms of accounting handling and impact due to its nature. ESPPs allow employees to buy company shares through salary deductions, with the company providing matching or discounted shares as an incentive.
Plan types
Globally, there are two main ESPP types. Company goals and objectives may help determine which plan type is best for a company to implement.
- Purchase at a discount to market value
An employee’s payroll is deducted and accumulated until the purchase date, on which the total funds will be used for purchasing company stock at a pre-determined discount (often between 5% and 15%).
- Matching shares
Employees purchase shares under the ESPP, and the company offers a matching number of shares at no cost to the employee. Typically share matching is at a 1:1, 1:2, 1:3, 1:4 ratio.
Accounting and reporting impacts and consideration
ESPP has various accounting and reporting obligations, including but not limited to:
- Offering Periods: Typically, 12 to 24 months, with a series of purchase periods where an employee has money set aside to purchase shares through regular payroll deductions. Each purchase period under an ESPP can be regarded as a separate share option with fair value calculated and accrued over the offering period. Tranche-by-tranche valuation and acceleration attribution is applicable under ASC 718 and IFRS 2.
What is ASC 718? ASC 718 (under US GAAP) outlines standard accounting guidelines for stock compensation providing specific rules on how companies should record and report any expenses related to equity-based compensation.
What is IFRS 2? IFRS 2 is an international accounting standard requiring companies to recognize share-based payment transactions and report profit or loss in their financial statements.
- Global ESPP plans: Global ESPP plans can have varying accounting implications. For instance, when employees relocate to different countries, it's crucial to consider the accounting impacts of changes in their contribution amounts. Partnering with an expert in global financial reporting is essential.
While these are some of the more common implications it’s important to recognize there can be additional accounting and reporting obligations specific to each country’s rules and regulations. Partnering with a knowledgeable and experienced expert who can manage all accounting and financial reporting requirements is a significant advantage for companies globally.
Contact us today to learn more about Computershare’s ability to support your ESPP accounting and financial reporting obligations.
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What are my Chapter 17 Interim/Annual disclosure reporting requirements?
With the recent amendments to Chapter 17, effective 1 January 2023, Hong Kong listed issuers have had to amend scheme rules specific to the source of shares.
Depending on the source of shares, key disclosure requirements vary. In particular, the Interim/Annual Report Disclosure requirements have increased now demanding the most detailed level of participant grant data all depending on the source of shares being used.
Issuing new shares
Now requiring the most comprehensive reporting data, new share issuance requires the following be reported:
- Awards granted to directors, the chief executive or substantial shareholders, or their respective associates
- Awards in excess of the 1% individual limit
- Awards in any 12-month period exceeding 0.1%
- Other employees
Using existing shares:
While less detail is required than that of issuing new shares, reporting data requirements for using existing shares is as follows:
- Directors
- Five highest paid individuals in aggregate
- Other employees in aggregate
It is crucial for listed issuers to carefully review the specific disclosure requirements based on the source of shares used in their share schemes. To ensure compliance, disclosure information must be submitted in a specific format and often requires sufficient time to collect, verify, calculate, and consolidate necessary data. Failure to comply with the disclosure requirements may result in regulatory actions and potential penalties.
What your share plan provider can do for you
While preparing HKEX Chapter 17 disclosures can be complex and time-consuming, there are streamlined solutions that your share plan provider can assist with to provide accurate, timely, and compliant deliverables:
- Compliance with HKEX format requirements
- Automatically calculate and generate data
- Data verification to guarantee accuracy
- Pre-store employee categories
- Bilingual reports- English and Chinese
- Customizable reports if required
Computershare Plan Manager works with many issuers across various industries to help them with Chapter 17 disclosure reporting, allowing them to save time and resources.
Discover how Computershare can assist you with your HKEX Chapter 17 disclosure requirements.
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Can large volume employee share plan transactions be considered 'Block Trades'? What are the benefits of this approach?
Throughout 2024, we have seen Block Trading become more popular with Hong Kong listed companies, especially those with lower liquidity or less shares available to the public. Some large volume employee share plan transactions can indeed be considered Block Trades. They serve as a viable alternative for purchasing or selling employee share plan shares.
What is a Block Trade?
A Block Trade is the purchase or sale of a large volume of securities in a single transaction. Also referred to as Cross Trade, it is a high-volume transaction in the securities market that is privately negotiated and may be executed outside of trading sessions. By conducting block trades, companies can significantly reduce the impact of large transactions. Benefits include, relieving price volatility for low trading volume stocks, encouraging greater share price stability and enabling simple, one-time disclosure for directors.
What types of transactions can be considered Block Trades?
A block trade may involve a large volume of shares from a small group of plan participants, or a large group of participants individually with small volume of shares.
Transactions on both the company side, and the participant side can be considered as block trades —this includes vested shares or share options under employee share plans. Companies can also leverage these privately negotiated trades to purchase shares through their trustee (if applicable) or sales for their ESOPs.
Finding an employee share plan partner that has experience in executing block trades can make the process smoother. Computershare has experience in executing such market transactions for our employe e share plan clients.
For more information on Block Trades, please reach out to our team.
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How are companies making their employee share plans more attractive in the current market?
We continue to see many clients become more flexible in the way they structure and manage their share plans, particularly when it comes to vesting schedules and dividend entitlements. We’ll explain more below.
Alterations to vesting schedules
We’ve seen many companies change their vesting frequencies from yearly to quarterly, or in some cases even monthly. Some companies are also applying performance-based vesting schedules as a creative approach to making vesting more flexible.
For example, a participant who meets or exceeds their KPIs may have the opportunity to change their yearly vesting to monthly, which is obviously more desirable from the participant’s perspective.
Changing dividend entitlements
Participants may have the right to receive dividends from their employee share plan holdings, depending on plan rules. The most common practice with dividend entitlement is where participants only receive dividends if the award is fully vested.
We’ve seen many companies offering flexibility around dividend entitlements including permitting participants with unvested share awards to receive dividends.
We also discussed share plan flexibility in our recent article Maintaining employee share plan participation in an uncertain economic landscape.
To learn more about employee share plan flexibility and how you can optimise your share plan, please reach out to our team today.
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Once a company has opened a domestic SAFE account, what types of funds can be transferred in and out of it?
After completing the SAFE initial registration, the domestic agency shall open a dedicated SAFE account through their domestic bank with the SAFE approval issued by the local SAFE authority.
Only funds related to share incentive plans can be transferred through domestic SAFE accounts. Below are the types of funds that can be transferred into the account:
- SAFE funds transferred from the individual’s foreign exchange savings account
- SAFE funds obtained from the unified foreign exchange purchase by domestic agencies
- Principal and income repatriated by individuals after selling shares under the share incentive plan
- Dividend funds repatriated and,
- Any other income approved by the local SAFE authority.
Below are the types of funds can be transferred out of the account:
- Overseas payment of funds required for participation in the share incentive plan
- Settlement of foreign exchange repatriation funds or,
- Transfer of funds to personal foreign exchange savings accounts and,
- Any other expenditures approved by the local SAFE authority.
To find out more about SAFE Circular 7 and ongoing requirements visit this page.
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My company currently issues new shares to meet our Share Option plan's vesting requirements. Can we use existing shares instead? If so, what's the best way to facilitate this approach?
It's common practice for many companies in Hong Kong to issue new shares on the market to fulfil their share option plan needs. But many companies are unaware that this is not a mandatory requirement.
Some companies may be worried about any potential dilutive impact on shareholders if the employee share plan applies newly issued shares. Companies with Share Option or Share Award plans that utilise newly issued shares may be subject to stricter compliance requirements under the Hong Kong Listing Rules. Based on the latest Chapter 17 amendments, the mandate limit for all schemes combined, must not exceed 10% of the shares on issue. This limit can be reset after three years from shareholders' approval of the scheme.
With the Chapter 17 amendments effective since 1 January 2023, an increasing number of companies plan to use existing shares to meet their needs for share option plans. This is usually facilitated through an employee share plan trust arrangement.
Companies may consider using a trust arrangement to allow the flexibility of a shared resource under their Share Option or Share Award scheme, or simply to utilise existing shares where the disclosure and compliance requirements under Chapter 17 amendments are comparatively reduced.
Computershare Hong Kong Trustees Limited (CTL) is an independent legal entity with a Trustee licence in Hong Kong. It was established to integrate with Computershare Plan Managers Asia and provide a true one-stop solution for Hong Kong-listed issuers. Through this one-stop solution, companies can delegate day-to-day administrative and management tasks to us. We have expertise in administration and management of stock options, vesting periods, exercise conditions, and distribution of shares. We can handle the logistics, compliance, and record-keeping, relieving your company of the associated administrative burden.
To learn more about employee share plan trusts, click here.
If you're ready to set up a trust arrangement, please contact our team today.
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Are there specific share plans used depending on the stage and scale of company development?
There are no general rules or restrictions as to when your company should choose to implement share incentives. Every company will have different goals and size of employee population depending on what stage of development they are in. This will therefore drive the type of share plan that is most suitable for them.
Based on our experience, here is what we have seen across the market:
- Companies in the early stages of development, especially in high-growth industries such as I.T., high-tech and biomedicine will be reliant on the creative value of employees to drive the establishment, development, and maturity of their corporate business model. In these high growth industries, SOS are more common as they help to retain and motivate employees and ensure employee contributions are closely linked to the growth of the company.
- Companies in the post-IPO stage, will most likely have a mature and stable business model, therefore it is more common to see these companies choosing Restricted Stock Units (RSU) due to their relatively stable returns. However, if for some reason any market fluctuations occur or the stock price is undervalued, your company may consider returning to SOS to balance financial costs.
- Mature companies with a sizeable employee population will typically implement executive share plans, as well as a share plan for their broader employee base. The Employee Share Purchase Plan (ESPP) is an emerging incentive tool that is growing in popularity across Asia. It encourages employee ownership and is often used as a key retention tool.
To design the most appropriate and effective share plan, companies should work with an accredited, professional share plan provider to design, implement, and manage their ESOP.
For more information, reach out to our team today.
An Employee Share Ownership Plan (ESOP) is a supplementary form of corporate compensation that provides additional benefits to employees through financial instruments such as Share Options Schemes (SOS). An ESOP can help unlock an effectiveness that traditional salary reward mechanisms do not offer, by utilising various financial instruments in the capital markets to amplify the benefits.
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How can company "insiders" trade during the blackout period in the US market, given SEC restrictions?
It is common for corporate executives to use a 10b5-1 plan to ensure adherence to insider trading laws and to avoid any chance of accusations of insider trading in the US market.
A 10b5‐1 plan is a written plan for trading securities that is designed in accordance with Rule 10b5‐1 of the Securities Exchange Act of 1934 (the “Exchange Act”) in US, which allows insiders of a listed company to sell a pre-determined number of shares at a pre-determined time in accordance with insider trading laws.
In the trading plan, the price, trading amount, and sales dates must be specified in advance and determined by a formula or metrics. When making the sale plan, the seller must not have access to any material non-public information, e.g. during window-open period.
The following are a few key benefits of having a 10b5-1 plan:
An affirmative defense to insider trading allegations for persons trading pursuant to the plan
More opportunities for insiders to sell their shares, especially during a blackout period and greater certainty in planning the transactions
Potentially less negative news associated with insider sales
Less burden on legal counsel or compliance officers who would otherwise have to make subjective determinations about the availability or possession of material non‐public information each time an insider seeks to buy or sell shares
For more information, reach out to our team today.
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What is an employee share plan trust?
An employee share plan trust is a trust set up between the Company and the Independent Trustee for the purpose of acquiring and safekeeping of the Company's shares, under an employee share plan.
Established through the execution of a Trust Deed between a company and an independent trustee, a trust arrangement requires an initial settlement of funds into the trust to occur. The company can further contribute to the trust, so that the independent trustee can acquire the company's shares on market to satisfy future vestings of share awards granted to employees (i.e. beneficiaries). Alternatively, the company may also issue new shares to be held by the Trust during the vesting period.
Why use an employee share plan trust?
Facilitate a compliant management solution in accordance with Hong Kong Companies Ordinance, Hong Kong Stock Exchange Listing Rules and other regulatory requirements
Minimise shareholder dilution through on market purchase
Mitigate price fluctuation risks via customised share acquisition strategies
Undertake scheme shares acquisition and custody
Manage employee contributions, issuer matching and resulting share purchases
Liaise with independent auditors to conduct share plan audits
For more information, read our article — Understanding employee share plan trusts.
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What is the difference between a Share Option Scheme and Share Award Scheme?
When it comes to non-contributory employee share plans, there are two main options- Share Option Schemes (SOS) and Share Award Schemes (SAS). Both SOS and SAS are commonly used by companies to reward employees and are governed by Hong Kong Stock Exchange Listing Rules.
Share Option Scheme (SOS):
Participants are granted the right to purchase a certain number of shares at a pre-determined price and conditions within a certain period in the future.
Share Award Scheme (SAS):
Shares are granted to the participants on the grant date, but the sale or transfer of shares is subject to vesting criteria.
One of the key differences between these two types of schemes is the point in time that participants can access their shares. With a share option scheme, participants can access their shares after exercising them once vesting conditions are met, and for those in a share award scheme, participants should wait until vesting has occurred prior to gaining access.
When it comes to overarching benefits, Share Award Schemes often serve as the most appealing share incentive tool for attracting and retaining employees. Whereas Share Option Schemes can be a more cost-effective approach for companies, reducing administration costs and not requiring immediate cash flow.
The table below provides a summary of the key differences and considerations.
|
Share Option Schemes (SOS) |
Share Award Scheme (SAS) |
| Key features |
- Cost to employees to pay the exercise price
- Choice of exercise day upon vesting
|
- Free to employees
- Pre-determined vesting date
|
| Admin considerations |
- Shares to be allotted directly to employee upon exercise or shares to be acquired or allotted through a trust model upon grant
- Cash flow management is flexible depends on the source of shares
- Exercise prices to be handled
|
- Shares to be acquired or allotted through a trust model upon grant
- Administration is straight forward, with shares only transferred to employees upon vesting
|
| Key benefits |
- No immediate cash flow needed
- No value to employees if options expire
- Subject to different jurisdiction, Tax is only payable on the exercise of the option
|
- Employees become shareholders immediately upon vesting
- Always has value to employees
- Most attractive share incentive tools
|
If you would like more information about either of these share schemes, please reach out to our team.
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