Incentive stock options, which take the company's stock rights (shares) as the objects and adopt the means of stock options, restricted stocks, stock appreciation rights and so on, may stimulate company directors, senior management members and core technical staff to tie their own interests closely with the operation of the company and serve it on a long-term basis. Apart from restricted stocks, the types of incentive stock options also include stock options, employee stock ownership plans, dividend rights, share appreciation rights, inspiration fund and other common types.
As the incentive targets often bear the dual status of shareholders and employees, the incentive legal relationship has both features _ complexity and inter-sectionality. Therefore, there are different opinions on the nature of the disputes generated from incentive stock options, _whether it can be categorized as of labor disputes or contract disputes. Disputes of stock ownership are about the contract relationship between equal parties, emphasizing the autonomy of will, and should be regulated by the civil law while labor disputes, based on personal status relationship, shall be regulated by employment and labor laws and regulations. Various legal relationships differentiate legal interests, the application of law and judges' tendency to exercise discretion.
Through case analysis, the author summarizes the considerations of different opinions on the disputes caused by the incentive stock options and puts forward corresponding legal advice..
I. Opinions on Disputes of Incentive Stock Options in Judicial Practice
1. Labor Disputes
[Case 1] Zhuji Tongfang Real Estate Co., Ltd. v. Liu Yong
In this case, Court of Second Instance deemed, " i[I]n this case, Contract of Incentive Stock Option is an arrangement of incentive and the relevant compensation that the appellant is willing to provide in order to persuade the appellee to work for him, based on the relevant affairs of Labor Contract agreed by both parties. The compensation equals to the incentive provided by appellee's former employer Kaiyuan Tourism Group. This contract is generated from the labor relationship between the appellant and the appellee, and it is indispensable from the labor relationship between the two parties. The Incentive stock option was the stimulus and compensation which was offered by the appellant willingly to attract senior management talents, and shall be regarded as the extra reward apart from the basic wage. Therefore, the case shall fall into the scope of labor dispute.
From the the second instance judgment, the court considered the starting point of signing the Contract of Incentive Stock Options, and affirmed the purpose and background as the key factors to determine the nature of the dispute. Affirming that the incentive stock option is generated from the labor relationship and is a kind of management and payment distribution, the interests obtained from it are extra payments for the employee.
[Case 2] Boyan Science & Technology Co, Ltd. v. Wen Jian
In this case, Shenzhen Intermediate People's Court deemed: "the loss caused by the company's illegal action of buy-back the restricted stocks of the employees shall fall into the scope of labor disputes, and shall be analyzed from the following aspects:
1. In this case, the defendant granting the restricted stocks to the plaintiff is based on the long-term labor relationship between two parties. The plaintiff's performance, contributions to the defendant, status and effects of the plaintiff shall be taken into full consideration, and its purpose was to boost the morale of the plaintiff. According to the Restricted Stock Incentive Plan of the defending company, the company was entitled to require the incentive object to work for the company as required by the post. Reviewing the reasons of receiving the restricted stocks, it manifests the typical features that the employee is managed by the employer.
2. Judging from the conditions for the free flow of the restricted stocks, although the inspection of the restricted stocks was conducted by Boyan Co., Ltd., the assessment shall be based on employers' performance in the employer's unit, including whether the performance meets the standard during service, whether the employee violates the law, or w has negligence or misconduct and so on. It also manifests the typical features that the employee is managed by the employer.
3. In accordance with section 2, article 76 ofLabor Law of PRC, the employer shall create conditions to improve the collective welfare and the remuneration of employees. The restricted stock obtained by the plaintiff shall flow freely at market price under the prescribed conditions of Stock Incentive Plan, and the plaintiff could receive the corresponding returns based on the above prescription. The stock returns shall be deemed as part of the welfare provided by the employer to the employee, and the dispute shall consequently fall into the scope of labor disputes.
(2) Contract Disputes
[Case 1] Mr. Peng v. Shenzhen FUANNA Household Supplies Co., Ltd.
In this case, the court deems: from the following statement in commitment letter, "I, Mr. Peng, is the stockholder of FUANNA Company. Up to the signing date of this commitment letter, I have held 27, 700 shares of the company's stock. I work in this company and obtained the above stocks by the preferential conditions".Mr. Peng made the above commitment after he was offered the qualification of purchasing the shares of FUANNA Company and became a shareholder, though offering the qualification of purchasing the shares to Mr. Peng was not the obligation of FUANNA Company as the employer. Although the statement of "no resigning from the company in the written form, and no absenteeism without reason for consecutive 7 days" in the commitment letter involves the labor discipline which employees shall observe, while it is not the commitment of the employee to obtain the job offer. The content of the commitment is not the supplement to the labor contract between FUANNA Company and Mr. Peng, but the commitment made by Mr. Peng after he obtained the qualification of purchasing the shares of FUANNA Company with the preferential price. That is to say, on one hand, FUANNA Company offers the qualification of purchasing the stock of the company with the preferential price, on the other hand, the company shall setcertain restrictions to Mr. Peng's behavior. Mr. Peng shall make a certain commitment when he confirms that he transfers the restricted stocks to common stocks, and it is the shareholder's commitment to the company based on subscription of stocks. Mr.Peng exchanges his commitment for the share returns, so the dispute between FUANNA company and Mr. Peng is a common contract dispute, not a labor contract dispute. Judging from the content of the commitment letter complies with law, Contract Law and Corporate Law, not Labor Contract Law shall apply.
[Case 2] Fujun v. Taobao (China) Software Co., Ltd., Alibaba Group Holding Ltd.
In this case, the first and second instance courts both deemed that the rights and obligations of the two parties endowed by the action of confirming stock options in contract shall not be regarded as the rights and obligations in labor contract. The property income in stock option is not employee's labor remuneration, such as wages, rewards and welfare. As an employee, Fu Jun received the labor remuneration from Taobao Software Company through providing labor. In order to boost Fu Jun's morale and loyalty to Taobao Software Company and Alibaba Group, Alibaba Group offered the stock option incentive to Fu Jun, which was the contract consideration provided to Fu Jun for the extra work apart from his normal labor obligation. The property income brought by stock option shall not be considered as labor remuneration.
II. Legal Analysis of the Distinction of Incentive Stock Options Disputes
As for the nature of incentive stock options, there is no clear stipulation in law. In judicial practice, as for whether the disputes of Incentive stock options fall into the category of labor disputes, its core lies in the distinction of the nature of the interests generated by the incentive stock options, i.e., whether the interest is labor remuneration.
Opinion 1: the income from incentive stock options is not labor remuneration. Labor remuneration, which is taken as the consideration of employee's labor, shall be issued in the form of currency. While the returns of incentive stock options are different, the relevance and congruity between the employee's incentive stock options and his/her labor remuneration is weak, manifesting the risk-sharing and interest-sharing between the company and the object of incentive. The object of incentive shall not only provide labor, but also undertake the operational risk of the company. And apart from the object's own factors, whether the object would obtain the returns shall depend on outside factors.
Opinion 2: the return of incentive stock options is labor remuneration. The incentive stock options is the extra payment based on the basic payment of the incentive object. When the company designs the incentive stock option plan, it would take the anticipated returns of the stock ownership as part of the incentive object's payment. When the personal income is calculated, the stipulation of "wages and personal income" shall be applied.
Opinion 3: in fact, the incentive stock option is a kind of welfare provided by the company to the employee. The welfare for employee is the various treatment provided by the company to retain and stimulate employee by non-cash means, including legal welfare items, and non-official welfare determined by the company at its discretion, including employee dormitories, health care, vacations and so on.
Apart from considering whether the returns transferred from the incentive stock options fall into the scope of labor remuneration, while determining whether the incentive stock options are labor disputes, the judiciary would consider the following factors in practice:
1. Reasons of Obtaining Incentive Stock Options
Whether the behavior of conferring incentive stock options is based on the labor relationship between the two parties, for instance: (1) taking the long-term labor contract relationship and whether the company has considered sufficiently the performance and contributions of employees as the prerequisite; (2) whether the incentive stock option is the means to attract talents.
2. Transferring Condition for the Returns of Incentive Stock Options
Consider whether the transferring condition for the returns of incentive stock options is based on the working performance of the employee in the employer's unit. For instance, whether the performance of the employee in office meets the standard, and whether the employee has the action of violating laws, misconduct and so on.
3. Disputes due to the required items of the object of the incentive stock options. The required item of the employee may be: requiring the offering subject of the incentive stock options to confer the restricted stock or requiring to exercising the stock option, or requiring to confirm his identity as a shareholder. In principle, this kind of disputes shall not be handled according to the labor disputes procedure, and shall be treated in accordance with the civil procedure. If the required item is the compensation of loss for buy-back, then under the prerequisite that the generation of incentive stock options is based on and closely related to the mutual labor relationship, there is possibility that the judiciary rule the case as labor disputes.
4. Identity of Incentive Stock Options Object. If the object of the incentive stock options has completed the changing procedure of industrial and commercial registration, and the object has become the shareholder of the company, then Corporate Law, Contract Law shall be applied to the relevant disputes of incentive stock options.
Of course, when the legal procedure is initiated, based on the consideration of the litigation cost, the parties involved would also choose labor disputes as the cause of action to submit the application of labor arbitration.
III. Legal Advice
To sum up, as for the issue whether the dispute caused by incentive stock options shall be treated as labor disputes, there is no generalized standard currently. The determination of this issue needs continuous summary of judicial experience and further confirmation of the relevant authorities.
Because the purposes of providing incentive stock options to the employee by the employer are different, it is very difficult to determine whether the disputes of incentive stock options are labor dispute or contract disputes, and to determine which one is more preferential to enterprises. In practice, it is common that the employee claims the relevant rights of incentive stock options to enterprises. Judging from the angle of burden of proof, if the dispute of incentive stock options is deemed as a labor dispute, then compared to a contract dispute, the burden of proof for the employer shall be heavier, and the responsibility and legal risk would be higher.
In conclusion, from the angle of burden of proof, the advice for enterprises is as follows:
1. Combining the actual situation of the enterprise, design the incentive stock options plan to conform to its own development and goals, and determine the objects who shall participate in the incentive plan;
2. As the circumstances may require, consider whether the changes of industrial and commercial registration shall be handled for the objects of incentive stock options, and confirm their identities as shareholders;
3. Try to "peel off" or "dilute" the relevance between the incentive stock options and the labor relationship, such as adopting the means of replacing Contract by Commitment Letter;
4. If the veto conditions of incentive stock options include employee's failing to meet the standards, violating discipline or law and so on, the enterprise's assessment results about the employee's performance shall be legal and reasonable in terms of systematic basis, facts, evidence, procedure and so on. Otherwise, the flaws of performance assessment and disciplinary actions in response to violation of regulations would not only cause the enterprise undertake the legal risk of employment, but also make incentive stock optionsin vain.