Raising capital through private share issuance and retaining talent through ESOP are familiar tools for FDI enterprises structured as joint-stock companies. But both are "conditional issuances" — wrong procedures can get the issuance challenged or even invalidated.
This article analyzes conditions, procedures, and risks under the Enterprise Law 2020 and the Securities Law 2019.
Table of contents
- 1. Private placement: concept and the 100-investor line
- 2. Conditions and procedures for private placement
- 3. ESOP: essentially private placement for employees
- 4. Handling existing shareholders' preemptive rights
- 5. The FDI factor: foreign ownership caps and investment procedures
- 6. Common risks and prevention
- Q&A
1. Private placement: concept and the 100-investor line {#s1}
Under Article 123 of the Enterprise Law 2020: private placement is offering shares to fewer than 100 investors, excluding professional securities investors, or only to professional securities investors.
The 100-investor threshold is the key legal line:
- Fewer than 100 (or only professional investors): private placement — Enterprise Law procedures;
- 100 or more to the public: public securities offering — must register with the State Securities Commission under far stricter conditions.
Crossing the line without public-offering registration violates securities law.
2. Conditions and procedures for private placement {#s2}
For non-public joint-stock companies (the common FDI case):
- GMS approval of the issuance plan: investors, quantity, offering price, timeline;
- Decision on existing shareholders' preemptive rights (see section 4);
- Execute the offering to approved investors;
- Register changes to charter capital with the business registration authority after completion.
For public companies (including listed FDI): under Article 31 of the Securities Law 2019, private share placement must meet investor-eligibility conditions (professional securities investors, strategic investors, fewer than 100 non-professional investors) and be registered with the SSC — significantly more complex.
3. ESOP: essentially private placement for employees {#s3}
ESOP (Employee Stock Ownership Plan) — share issuance under employee stock option programs — is essentially a private share issuance to employees.
Consequences:
- ESOP is not "discretionary share awards" — it requires GMS approval;
- It must comply with private-placement investor and procedure conditions;
- A detailed ESOP regulation is needed: eligibility, issuance price, vesting schedule, transfer restrictions, and treatment upon employee departure.
Commonly missed: clauses on ESOP shares when employees leave (repurchase? forfeiture of unvested rights?) — a frequent dispute source when undefined.
4. Handling existing shareholders' preemptive rights {#s4}
Under Article 124 of the Enterprise Law 2020, existing shareholders have preemptive rights on new share offerings pro rata — unless the GMS decides otherwise.
Private placements/ESOPs dilute existing shareholders. Before issuing to new investors, the GMS must decide on limiting or waiving preemptive rights. Without this decision, the issuance may be challenged by shareholders seeking annulment.
5. The FDI factor: foreign ownership caps and investment procedures {#s5}
When foreign investors buy privately placed shares, there are two parallel compliance layers:
Layer 1 — Enterprise/Securities Law: issuance conditions and procedures as above.
Layer 2 — Investment Law:
- Foreign ownership limits in conditional sectors (e.g., certain services, telecoms, banking have foreign ownership caps);
- Capital contribution/share purchase registration: foreign investors must notify/register with the investment registration authority;
- Capital accounts: open and use investment capital accounts (direct/indirect) per foreign exchange regulations.
Missing layer 2 is a common error: an issuance valid under enterprise law but violating investment/foreign-exchange rules.
6. Common risks and prevention {#s6}
| Risk | Prevention |
|---|---|
| No GMS approval / missing preemptive-right waiver | Every issuance plan needs a complete GMS resolution |
| Unreasonably low ESOP pricing → minority dilution complaints | Independent valuation; explain pricing basis in the GMS proposal |
| Unclear vesting and transfer restrictions → disputes on departure | Detailed ESOP regulation, employees sign acknowledgment before joining |
| Employees' PIT obligations on receiving/selling shares | Tax advice before rollout; clearly allocate tax burden |
| Foreign investors exceeding conditional-sector ownership caps | Review WTO commitments and specialized laws before issuing |
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Q&A {#faq}
Q: How does private share issuance differ from a public offering?
A: Under Article 123 of the Enterprise Law 2020, private placement is offering to fewer than 100 investors (excluding professional securities investors) or only to professional securities investors. Public offerings must be registered with the SSC under far stricter conditions. The 100-investor threshold is the key legal line.
Q: What is ESOP and can FDI enterprises implement it?
A: ESOP is a program issuing shares preferentially to employees. FDI enterprises (as joint-stock companies) may implement ESOP — it is a private share issuance to employees, requiring GMS approval and compliance with private-placement conditions and procedures.
Q: Does private issuance require General Meeting of Shareholders approval?
A: Yes. The private issuance plan (investors, quantity, price, timeline) must be approved by the GMS. The GMS must also decide on limiting/waiving existing shareholders' preemptive rights (Article 124) if the issuance dilutes them.
Q: What procedures do foreign investors need for buying privately placed shares?
A: Beyond issuance procedures under the Enterprise/Securities Law, foreign investors must comply with: (1) foreign ownership limits in conditional sectors; (2) capital contribution/share purchase registration under the Investment Law (notifying the investment registration authority); (3) opening and using indirect investment capital accounts as prescribed.
Q: What are common ESOP risks?
A: Four risks: (1) no GMS approval or missing waiver of preemptive rights — the issuance may be challenged; (2) unreasonably low ESOP pricing triggering dilution complaints from minority shareholders; (3) unclear vesting and transfer restrictions causing disputes with departing employees; (4) employees' personal income tax obligations on receiving/selling ESOP shares.
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This article is general legal information and does not replace legal advice for any specific matter.
Need a lawyer for private issuance — ESOP? Contact FLAT Law Firm — we help build issuance plans, ESOP regulations, and investment procedures. Hotline: 0988424851.
