Advisory
China
Advisory
China
Executive
Compensation &
Benefits
April 12, 2012
China's New Foreign Exchange Control Rule
on Overseas Equity Incentive Plans
by Woon-Wah Siu, Lu Wang and Joseph J. Kaufman
New requirements for foreign exchange registration of equity incentive plans
are now in effect. Overseas-listed companies that grant equity awards to
employees of their Chinese affiliates should review their registration status and
periodic filing schedules to make sure they are in compliance, especially in
view of the new, shorter deadline for filing quarterly reports and the need to file
amendments.
On February 15, 2012, the PRC's State Administration of Foreign Exchange (SAFE) promulgated new
guidelines governing foreign exchange registration requirements relating to equity incentive plans of PRCbased companies listed on overseas stock exchanges. The guidelines are set forth in SAFE Circular on
Issues concerning the Administration of Foreign Exchange Used for Domestic Individuals' Participation in
Equity Incentive Plans of Companies Listed Overseas (Circular Hui Fa [2012] No. 7) (Circular 7). Circular 7
superseded the old guidelines Circular Hui Zong Fa [2007] No. 78 (Circular 78) and Circular Hui Zong Fa
[2008] No. 2. Circular 7 took effect upon its promulgation.
Circular 7 defines the scope and content of SAFE's registration and reporting of foreign exchange matters
relating to employee participation in equity incentive plans, reduces the number of supporting documents
required for initial registration, and shortens the time for filing of quarterly reports. Circular 7 also requires
an amendment to the foreign exchange registration (SAFE registration) when any major change is made to
a registered equity incentive plan, or when the plan is terminated.
Coverage

Circular 7 covers all types of equity incentive plans that involve the grant of stock or other equity of
overseas-listed companies to participants, including employee stock ownership plans, employee stock
option plans, stock appreciation rights, restricted stock/restricted stock units, performance shares/
performance share units, phantom stock, stock purchase plans and any other equity incentive plans
permitted by relevant laws.
Pillsbury Winthrop Shaw Pittman LLP www.pillsburylaw.com
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Advisory
China

Covered entities are "domestic companies," defined to include overseas-listed companies that were
incorporated in China, PRC branches or representative offices of overseas-listed companies, PRC
parent companies, subsidiaries, partnerships and other PRC institutions that directly or indirectly control,
or are controlled by, overseas-listed companies.

Covered participants are directors, supervisors, members of senior management, other employees and
those with labor service relationships with domestic companies, regardless of these individuals'
citizenship.
Involvement of Agents
A local agent must be appointed to handle the SAFE registration, foreign currency bank account openings,
and funds transfers for participants in an equity incentive plan. The domestic company can be the local
agent, or it can designate a domestic institution qualified to engage in asset custody as the local agent. An
overseas agent is required to handle the exercising of options, purchases and sales of equity shares, and
transfers of funds. Circular 7 does not specify who can act as the overseas agent, but presumably the
administrator of the listed company's equity incentive plan can be the de facto overseas agent.
Registration Requirements
Initial Registration. Circular 7 has reduced the number of documents required for registration. The local
agent must submit the documents, in Chinese or translated into Chinese, relating to each equity incentive
plan for SAFE registration. The documents include:
1. An application letter and a SAFE registration form;
2. Documents to prove the authenticity of the equity incentive plan;
3. An authorization letter or agreement between the domestic company and the local agent making the
agent solely responsible for SAFE registration matters; and
4. A commitment letter from the domestic company stating the employment or labor service relationship
between the participants and the domestic company.
SAFE may require supplemental information. Circular 7 does not specify when the initial registration must
be made, but it is prudent to register equity incentive plans promptly after their adoption.
Amendment. In the case of any major changes to an equity incentive plan, such as a change to a key
term or a change due to a merger or acquisition, the local agent must amend the SAFE registration within
three months after the change occurs.
De-registration. The local agent must de-register the plan within 20 days after the expiration or
termination of an equity incentive plan.
Quarterly Reports
The local agent is required to file quarterly foreign exchange transaction status reports within three working
days (previously ten working days) after the end of each quarter.
Pillsbury Winthrop Shaw Pittman LLP www.pillsburylaw.com
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Advisory
China
Some Observations
We expect that the requirements under Circular 7 to be applicable to both new equity incentive plans and
existing plans that have already been registered pursuant to Circular 78. Therefore, overseas-listed
companies that grant equity awards to employees of their Chinese subsidiaries, branches, representative
offices, partnerships or other affiliates should review their current SAFE registration status and their
periodic filing schedules to make sure they are in compliance with Circular 7.
If you have questions, please contact the Pillsbury attorney with whom you regularly work or the authors:
Woon-Wah Siu (bio)
Shanghai
+86.21.61377924
woonwah.siu@pillsburylaw.com
Lu Wang (bio)
Shanghai
+86.21.61377999
lu.wang@pillsburylaw.com
Joseph J. Kaufman (bio)
Shanghai
+86.21.61377921
joseph.kaufman@pillsburylaw.com
Pillsbury Winthrop Shaw Pittman LLP www.pillsburylaw.com
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