Authors: Zhao Xiao /Wang Miao

(This article was first published on China Business Law Journal column \"Labor Law\", authorised reprint)

(资料图)

Employee stock option plans (ESOPs) are by no means new. Growing numbers of companies have adopted equity incentives to attract talent and motivate employees. However, this comes with an ever-increasing amount of domestic and foreign ESOP disputes.

There are no marked differences between foreign and domestic ESOP disputes in terms of the legal relationships and their nature. However, approaches to defence can vary by jurisdiction.

This article discusses the key points in mounting a defence in a foreign ESOP dispute from the perspectives of procedural defence and substantive defence.

PROCEDURAL DEFENCE

Unqualified subject and jurisdictional objection.Usually, in a foreign options dispute, the actual domestic employer does not directly execute an option agreement with a labourer. Instead, the employer signs an employment contract with the labourer while a separate foreign option granting entity executes the option grant agreement. Accordingly, the option granter and the employer are not the same.

In disputes of such arrangements, a domestic employer can claim that the domestic entity (the defendant) is not a qualified subject. Based on jurisdiction and governing law clauses under the option grant agreement, the foreign option granter can claim that the case is a foreign-related contract dispute. Foreign contract disputes should usually be resolved by foreign-related arbitration under the specified jurisdiction, thus raising a jurisdictional objection to the case.

In practice, debate remains as to whether an ESOP dispute is a labour or contract dispute. In Beijing, courts traditionally regard such cases to be contract disputes. However, the Beijing No. 1 Intermediate People’s Court’s recent tendency is towards holding ESOP disputes as labour disputes, deeming employee options to be essentially a type of benefit arising from an employment relationship.

Accordingly, a court hearing a foreign options dispute may reject the argument of unqualified subject and jurisdictional objection, but support precedents nonetheless exist. For example, inWind & Lu v Wang (2019), the Chaoyang District Court held that the legal relationship arising from an equity incentive was independent from the employment relationship, and that the subject, object, rights and obligations in, and the legal basis of the parties’ legal relationships, were all different. It thus determined that a dispute arising from an equity incentive contract was a civil contract dispute. Under a civil contract dispute, a court may uphold a company’s procedural defence.

Governing law in arbitration agreement. If the dispute resolution clause of an option agreement points to foreign-related arbitration, where the court upholds the overseas company’s jurisdictional objection, the labourer may claim that the arbitration clause is invalid and that Chinese courts have jurisdiction. Under such circumstances, the law governing the validity of the foreign-related arbitration clause may be confirmed by ascertaining the relevant extraterritorial law and conducting a systematic analysis, adopting a perspective most favourable for the validity of the arbitration clause.

SUBSTANTIVE DEFENCE

Procedure for, or specificities of, the granting of the foreign options are unlawful. Under the Measures for the Administration of the Equity Incentives of Listed Companies, any listed company’s share incentive plan must follow certain legal procedures, including:

A draft equity incentive plan that is prepared by the company’s remuneration and assessment committee under its board of directors;

The board voting to adopt the draft;

Expression of opinions provided by the independent directors and supervisory board;

An internal announcement of the beneficiaries of the incentive, before the convening of a shareholders’ general meeting;

Engagement of a law firm to issue a legal opinion on the plan; and

Voting on the plan at a shareholders’ general meeting.

Generally, an unlisted company’s equity incentive plan should also be approved at board and shareholders’ meetings. Where a plan’s details – such as grantor, exercise price, waiting period and exercise method – cannot be determined or specified, the plan is not viable and employees’ claims will likely go unsupported.

Foreign options not yet mature. Usually, the conditions for ESOP maturity will be set out in the option grant agreement – for example, whether an employee is required to achieve certain seniority or performance targets, or complete specific tasks – and the company is required to achieve a certain amount of turnover or financing, and that no event affecting its continuance as an ongoing concern, such as dissolution, has occurred.

Exercise conditions are not satisfied or exercise period has expired.An option agreement will usually specify the conditions that an employee is required to satisfy before exercising his or her options, or a specific exercise period. In a foreign ESOP dispute, the employee must provide evidence that the relevant exercise conditions have been satisfied, and that the exercise period has not expired. Failing this, his or her claims are unlikely to be upheld by the court.

Termination or cancellation triggering clause.An option agreement usually contains termination and cancellation clauses. Common causes of termination include the option holder’s disability or death, termination for cause or voluntary resignation. Common causes for cancellation include the complete invalidation of any unvested and unexercised portion of the options as a result of the employee’s conviction for a crime or alleged serious violation of a law, administrative regulation or company rule or regulation. Accordingly, even if options have matured, a company may request complete invalidation, cessation of vesting, complete buyback, total termination, or other method of handling pursuant to the option agreement.

Application for a stay of proceedings.The disposal of options often requires taking into account the employee’s performance and the provisions of the agreement to arrive at a specific determination. Ascertaining the establishment, performance and termination of the employment relationship between the labourer and the domestic company is the premise for hearing a dispute for the recognition of foreign options. Accordingly, under article 153 of the Civil Procedure Law, it is possible to claim that the trial of an options dispute case must be based on the outcome of the trial of an employment dispute, and an application may be made to the court to stay the proceedings.

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作者介绍

赵骁律师毕业于武汉大学法学院及中央财经大学法学院，分别获得学士及硕士学位，具有14年以上的法律从业经验，主要业务领域为人力资源法律和争议解决。

赵律师在为大中型企业提供法律服务方面有丰富的经验。赵律师擅长为内外资企业提供高标准的人力资源法律服务，包括代理劳动争议案件，劳资谈判，处理竞业限制与商业秘密争议，审查、起草和修改规章制度、法律文件等。除此之外，赵律师在商业秘密与人才争夺、人力资源合规、员工安置、高管解雇、突发事件处理、劳务派遣与人力资源外包以及企业控制权争夺等项目业务上拥有很多成功案例。

赵律师于2021年被评选为CLECSS“十大杰出青年法律人”和《商法》“Rising Stars律师新星”；于2022年荣登《商法》“The A-List法律精英：2022年中国业务优秀律师”榜单，并被The Legal 500评为《2023年度中国大陆榜单》劳动与雇佣领域“特别推荐律师”；于2023年被LEGALBAND评选为“2023年度LEGALBAND客户首选：劳动法律师15强”。

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王淼在中国政法大学先后获得法学学士学位和法学硕士学位。

王淼主要业务领域为人力资源合规、股权激励、公司内部治理及商事争议解决。王淼为数家大中型企业提供过法律服务，具有扎实的法学功底和专业水平，在人力资源合规体系架构、员工安置、复杂劳动争议解决、商业秘密与人才争夺等业务上拥有很多成功案例。

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