Circular on Issuing the Opinions on the Implementation of the Pilot Employee Stock Ownership Program by State-controlled Mixed Ownership Enterprises

　　Guo Zi Fa Gai Ge [2016] No.133

　　August 2, 2016

　　The people's governments of all provinces, autonomous regions, and municipalities directly under the Central Government, and ministries, commissions and agencies directly under the State Council,

　　Upon approval of the State Council, we hereby issue the Opinions on the Implementation of the Pilot Employee Stock Ownership Program by State-controlled Mixed Ownership Enterprises for your earnest implementation in light of your actual conditions.

　　Opinions on the Implementation of the Pilot Employee Stock Ownership Program by State-controlled Mixed Ownership Enterprises

　　In order to fully implement the guiding principles of the 18th National Congress of the Communist Party of China ("CPC") and the third to fifth plenary sessions of the 18th CPC Central Committee, and put into practice the "Four Comprehensives" strategic blueprint, and the development concept of innovative, coordinated, green, open and shared development, pursuant to the requirements of the Guiding Opinions of the Central Committee of the Communist Party of China and the State Council on Deepening the Reform of State-owned Enterprises (Zhong Fa [2015] No.22), with the approval from the State Council, we hereby put forward the following opinions on the implementation of the pilot employee stock ownership program by state-controlled mixed ownership enterprises.

　　I. Principles for the Pilot Program
　　1. Uphold the principle of compliance with laws and regulations, openness and transparency. Protect the legitimate rights and interests of various shareholders, strictly abide by the national laws, regulations, provisions on the restructuring of state-owned enterprises and provisions on the administration of state-owned property rights, ensure the openness of rules, procedures and results, avoid covert operations, prohibit transfer of benefits, and prevent losses of state-owned assets. Refrain from any infringement upon the legitimate rights and interests of non-shareholding employees in enterprises.
　　2. Uphold the principle of incremental introduction and binding of interests. Encourage employees to hold shares by means of increasing the share capital and establishing new investment projects while ensuring that the State holds a controlling stake in such enterprises. Establish a sound long-term incentive and restraint mechanism where eligible employees can buy shares at their discretion and shareholding employees can share the reform and development outcomes as well as market competition risks with their enterprises.
　　3. Uphold the principle of determining shares based on positions and dynamic adjustment of shareholding. The shareholding of an employee should embody the spirit of dedication, and should be closely linked to the position and performance of the employee. Employees at key technical, management and business positions are encouraged to hold shares. A sound equity transfer and exit mechanism shall be established within enterprises to avoid rigid shareholding.
　　4. Uphold the principle of strict control and intensified supervision on the scope of the pilot program. Specify rigid requirements for and maximum number of pilot enterprises and avoid "a rush into mass action". Tighten the examination and approval procedure, enhance follow-up guidance and strengthen evaluation and supervision to ensure that the pilot program identifies clear targets, carries out standardized operations and undergoes controllable processes.

　　II. Requirements for Pilot Enterprises
　　1. Commercial enterprises whose main business is in a perfectly competitive sector or field.
　　2. Having a rational shareholding structure, with a certain percentage of shares held by nonpublic shareholders, and with member(s) of the board of directors appointed by nonpublic shareholders.
　　3. Having a sound corporate governance structure, with a market-oriented labor and personnel distribution system, performance evaluation system, and market-oriented mechanism for the transfer of management personnel, the employment and dismissal of employees, and the adjustment of wages and salaries.
　　4. 90% or more of their business income and profits are derived from the market outside their own enterprises (groups).
　　Priority shall be placed on restructured research institutes, universities, high-tech enterprises and technological service enterprises (collectively "Technological Enterprises") with a high contribution rate of human capital and technical elements carrying out the pilot employee stock ownership program. In principle, the pilot program is temporarily not applicable to second-class or higher-class enterprises owned by the Central Government and first-class enterprises owned by the governments of provinces, autonomous regions, municipalities directly under the Central Government, and cities specially designated in the state plan. The pilot program shall not apply to enterprises that violate the relevant provisions on employee stock ownership in state-owned enterprises and fail to make rectifications as required.

　　III. Buying of Shares by Enterprise Employees
　　1. Scope of Employees. The employees who participate in shareholding shall be those working at important positions that have a direct or significant influence on the company's operating performance and sustainable development, such as researchers, management staff and key employees, and have signed labor contracts with their companies.
　　The pilot program shall not apply to the leaders of state-owned enterprises appointed by the CPC Central Committee, the State Council, or local CPC committees, governments or their subordinate departments and agencies, nor shall it apply to external directors or supervisors (including supervisors on behalf of employees) of enterprises. In the event that several people who are immediate family members work in the same enterprise, only one person is allowed to participate in the program.
　　2. Capital Contribution by Employees. Employees shall mainly make capital contributions in cash and make timely payment in full as agreed. According to the relevant national laws and regulations, employees who make capital contributions with their scientific and technological achievements shall provide relevant ownership certificates, have their value estimated according to the law, and handle the ownership transfer procedure in a timely manner. Listed companies participating in the pilot employee stock ownership program through buyback of their company shares shall comply with the relevant provisions.
　　Pilot enterprises and state shareholders shall not gift shares to employees, nor shall they provide financial support to shareholding employees by way of prepayment, guarantee, loan, etc. Shareholding employees shall not accept loans or financial aids from other enterprises with production or business relations with pilot enterprises.
　　3. Prices for Buying Shares. Financial audit and assets valuation shall be conducted for pilot enterprises before an employee stock ownership program is implemented. The prices for employees to buy shares shall not be lower than the estimated net asset value per share approved by or filed with relevant departments for the record. The prices for employees of state-controlled listed companies to buy shares shall comply with the relevant provisions on the securities regulation.
　　4. Shareholding Proportion. The proportion of employee shareholding shall be determined according to the business size, industrial characteristics, business development conditions, etc. The total shareholdings of employees shall, in principle, not be more than 30% of the company's total share capital, and the shareholding of an individual employee shall, in principle, not be more than 1% of the company's total share capital. Enterprises may reserve some share rights for new recruits by appropriate means. The proportion of employee shares in state-controlled listed companies shall be determined in accordance with the relevant provisions on the securities regulation.
　　5. Shareholding Structure. After an employee stock ownership program is implemented, the enterprise shall ensure that the state shareholders holds a controlling stake and their proportion of shareholdings shall not be less than 34% of the company's total share capital.
　　6. Shareholding Methods. Shareholding employees may hold shares in their own names or through a shareholding platform such as a corporate enterprise, partnership enterprise or asset management plan. In case of shareholding by way of an asset management plan, leverage financing shall not be used. No shareholding platform may engage in any commercial activity other than shareholding.

　　IV. Equity Management of Enterprise Employees
　　1. Equity Management Body. Equity interests held by employees shall be generally managed by representatives elected at shareholders' meetings, etc. or by corresponding agencies. Such representatives or agencies shall formulate corresponding management rules, exercise shareholders' rights on behalf of the shareholding employees and protect the legitimate rights and interests of the shareholding employees.
　　2. Equity Management Methods. Issues in respect of the routine management, dynamic adjustment and exit of employee shareholding of a company shall be jointly determined through consultations among the company shareholders, and shall be defined in the articles of association or shareholder agreements.
　　3. Equity Transfer. There shall be a lockup period of at least 36 months for the employee shareholding. Employees holding shares before the public offering shall not transfer their shares at the time of the initial public offering, and shall undertake not to sell their shares during the lockup period of not less than 36 months after the company goes public. Upon the expiration of the lockup period, the company directors and senior executives may sell no more than 25% of their total shareholdings per year.
　　Shareholding employees leaving their companies due to reasons such as resignation, transfer, retirement, decease or dismissal shall transfer all of their shares within their companies within 12 months. For transfer of shares to shareholding platforms, eligible employees or nonpublic shareholders, the transfer price shall be determined through consultations between the parties; for transfer of shares to state shareholders, the transfer price shall not be higher than the audited net asset value per share in the previous year. The transfer of employee shares in state-controlled listed companies shall be conducted in accordance with the relevant provisions on securities regulation.
　　4. Distribution of Dividends. Enterprises with employee stock ownership programs shall deal properly with the relationship between shareholders' short-term gains and medium and long-term business development, and properly determine profit distribution plans and distribution rates. Enterprises and state shareholders shall not make any commitment to shareholding employees in respect of annual profit distribution or minimum buyback. Shareholding employees shall enjoy the same rights and interests as state shareholders and other shareholders, yet shall not be given any priority in the distribution of profits over state shareholders and other shareholders.
　　5. Bankruptcy, Reorganization and Liquidation. In case a company with the employee stock ownership program goes bankrupt, the shareholding employees, state shareholders and other shareholders of the company shall assume joint and several liabilities to the extent of their respective capital contributions during reorganization and liquidation.

　　V. Implementation of the Pilot Program
　　1. Number of Pilot Enterprises. A limited number of enterprises shall be selected for the implementation of the pilot program. Each province, autonomous region, municipality directly under the Central Government, city specially designated in the state plan, and Xinjiang Production and Construction Corps may select five to ten enterprises, and the State-owned Assets Supervision and Administration Commission of the State Council may select ten subsidiaries of central enterprises to carry out the pilot program.
　　2. Determination of Pilot Enterprises. Pilot enterprises owned by local governments shall be jointly determined by the state-owned assets supervision and administration departments of the provincial people's governments and other related departments based on their application documents. Pilot subsidiaries of central enterprises shall be reported by state-owned corporate shareholders upon examination of application documents and determined by the agencies that perform the duties of investors.
　　3. Formulation of Employee Stock Ownership Plans. Pilot enterprises shall conduct an in-depth analysis of the necessity and feasibility of the employee stock ownership program, remind their employees of the shareholding risks by appropriate means, formulate employee stock ownership plans in strict accordance with the relevant provisions, assess employee shareholding risks and work out contingency plans accordingly. An employee stock ownership plan shall provide for the requirements of shareholding employees, shareholding proportion, price for buying shares, capital contribution methods, shareholding methods, distribution of dividends, equity management and transfer, shareholding adjustment following position changes, and other details.
　　4. Approval and Record-filing of Employee Stock Ownership Plans. Pilot enterprises shall seek opinions from their employees on their employee stock ownership plans by means of employee representative conference, etc. and the board of directors shall submit such plans to the shareholders' meeting for deliberation. Any employee stock ownership plan of a pilot enterprise under local government, upon approval of the shareholders' meeting, shall be filed with the agency that performs the duties of investors for the record, and a copy shall be submitted to the state-owned assets regulatory department of the provincial people's government. Any employee stock ownership plan of a pilot enterprise under the Central Government, upon approval of the shareholders' meeting, shall be filed with the agency that performs the duties of investors for the record.
　　5. Information Disclosure of Pilot Enterprises. Pilot enterprises shall disclose within their enterprises any important information such as the scope of shareholding employees, shareholding proportion, price for buying shares, transfer of shares, intermediary agencies, and audit and valuation information in respect of employee stock ownership plans, and effectively ensure employees' rights to know and supervise. State-controlled listed companies shall comply with the relevant information disclosure provisions of the securities regulatory authorities.
　　6. Standardization of Related Transactions. State-owned enterprises shall in no way transfer benefits to any enterprise that involves employee stock ownership within their business groups. State-owned enterprises purchasing products and services from or providing equipment, site, technology, labor and/or services to any enterprise that involves employee stock ownership within their business groups shall follow market practices and ensure fair prices and dealings. Related transactions shall be made public regularly by appropriate means by first-class enterprises and shall be listed as items subject to economic responsibility auditing for enterprise leaders and financial auditing.

　　VI. Organization and Leadership
　　The implementation of the pilot employee stock ownership program is essential to the overall reform and development of state-owned enterprises and to the fundamental interests of the employees. All local governments and relevant departments concerned shall attach great importance to the central task, enhance leadership and organization, and define the roles and responsibilities of related parties to ensure the pilot program is implemented in a standard and orderly manner. The State-owned Assets Supervision and Administration Commission of the State Council shall be responsible for the pilot work of central enterprises, while guiding local state-owned assets supervision and administration departments to carry out the pilot work, and timely report important issues to the leading group for state-owned enterprise reform under the State Council. The first batch of pilot enterprises is scheduled to start operation in 2016. All relevant agencies that perform the duties of investors shall carefully examine the application documents submitted by pilot enterprises to ensure that each and all enterprises meet the relevant requirements for carrying out the pilot program. A summary of periodic performance shall be made at the end of 2018. Depending on the conditions, the scope of the pilot program may be expanded. Pilot enterprises shall act in accordance with the relevant norms, strictly implement relevant decisions and go through the approval and record-filing procedures as required, and make solid efforts to steadily advance the pilot work, actively explore effective employee stock ownership models, optimize the operating mechanism of enterprises, and revitalize enterprises. All relevant agencies that perform the duties of investors shall conduct follow-up inspections for pilot enterprises on a regular basis, timely get informed of actual situation and identify and rectify irregularities. In case of any loophole in any system, process or management link causing losses of state-owned assets, damage to the legitimate rights and interests of shareholders or serious harm to the legitimate rights and interests of the employees of any enterprise in the implementation process of the pilot program, those who are responsible shall be investigated for their responsibility according to the law and relevant disciplinary rules.

　　State-owned financial and cultural enterprises shall comply with the provisions of the CPC Central Committee on employee stock ownership in such enterprises, if any. The equity interests and distribution of dividends in state-owned technological enterprises shall be in compliance with the relevant provisions of the State Council. Enterprises that have already implemented their employee stock ownership programs in accordance with relevant provisions may continue to implement their programs. These Opinions shall not apply to employee stock ownership in enterprises in which the state has a share.