Employee share plans for H-share companies

Chinese companies seeking to list in Hong Kong usually use either H-shares or red-chip listings. The H-share structure is often preferred due to considerations such as compliance with state-owned asset supervision, applicability of domestic legal frameworks, and the efficiency of capital repatriation. As entities registered in mainland of China, H-share companies listed in Hong Kong must comply with two regulation systems: China’s Company Law, Securities Law, and associated regulations, as well as Hong Kong’s Listing Rules and disclosure requirements.

On 17 February 2023, the China Securities Regulatory Commission (CSRC) introduced the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, along with five supporting guidelines. Effective from 31 March 2023, this regulatory reform marks a shift from an Approval-based system to a Registration-based system. The new regulations cover all Chinese domestic companies that are directly listed overseas. Under these regulations, H-share companies can apply for “Full Circulation” without separate approval, creating a dual regulatory framework: domestic record filings focus on national security and cross-border capital flows, while Hong Kong disclosures focus on investor protection. 

(Source: CSRC - implementation of the Registration-based system for overseas listings

http://www.csrc.gov.cn/csrc/c100028/c7124479/content.shtml)

Before listing, H-share companies usually use limited partnership platforms to manage employee share plans. This arrangement offers advantages such as tax efficiency and centralised control, helping to avoid shareholding diversity and other problems.

After listing, the main incentive tools used in employee share plans are share options and restricted share units (RSUs). The source of shares is a key factor in executing these plans. The CSRC’s 2023 regulations eased restrictions on issuing new shares for incentive purposes, paving the way for broader adoption of share option plans among H-share companies. For RSUs, companies can issue new shares as the source of shares under the updated rules or repurchase existing shares. Special attention should be paid to the compliance issues related to the source of funds for share repurchases. 

A major milestone came on 11 June 2024, when HKEX revised its Listing Rules to introduce a treasury stock regime. This allows listed companies to register repurchased shares as treasury stock. For H-share companies registered in mainland of China, these treasury shares can be used as part of their employee share plans. These regulatory updates reflect growing support for the development of employee share plans among H-share listed companies.