ESPOP – Whether the trend is being taken advantage and potential risks of shareholder disputes - Apolat Legal

ESPOP – Whether the trend is being taken advantage and potential risks of shareholder disputes

First appeared in San Francisco in 1956 as a way to transition ownership of two founders of Peninsula Newspapers, Inc.  (both of them were in their 80s) for their chosen successors – the managers and employees who had much dedication for the company,[1] ESOP (Employee Stock Ownership Plan – tentatively translated as “share issuance plan owned by employees”  or ” bonus share issuance plan for employees “) has gradually become a useful tool used in business activities to encourage employees to be more engaged, as well as “dedicated” to their company for shifting in perspective from “work for others” to “work for yourself. “

In Viet Nam, from a legal standpoint, the use of stocks to reward or resell to employees (including business management) with the incentive price (ESOP) has been regulated in the guiding documents of Law on Enterprises 1999, namely Circular No.19/2003/TT-BTC on the acquisition of issued ordinary shares (not exceed  30%) to convert to treasury stock of joint-stock companies.[2] Since then, subsequent amendments and additions to the Law on Enterprises, the Law on Securities have also had stricter provisions on the application of treasury stock to reward workers, namely: restrictions on the entity may perform (public company), procedures for implementation, capital,…However, during the post-2014-2015 period, especially after the series of listed enterprises (such as SSI, PAN, HBC, MGW,…) gradually approached and began to perform the release of ESOP, there has been increasing interest from Vietnamese companies in the adoption of new ESOP regime. With the financial benefits both for businesses and employees, and the encouragement for employees, ESOP today as a concept is familiar in business activities in Vietnam, even, for many listed companies, the release of ESOP has become a plan, an annual activity.

 Along with ESOPs are currently in fashion due to positive benefits, risks associated with an ESOP arise in recent years. Emerging practices on disputes over the interests of shareholders in the company in general and related to ESOP in particular, especially in the period from 2018 to the present, have risen substantially from both the shareholders and the rewarded employees. In addition, the  legal and commercial media also start to question, whether ESOP tend to be used as a tool for profit by shareholders and managers of the company. What are  the reason behind this argument?

In the writer’s opinion, the use of ESOP to profit is entirely possible, even ESOP, if not used logically and unreasonably, will become the cause of contention among the shareholders in the company, which come from the following reasons:

1| Direct impact on shareholders’ interests, especially minority shareholders

Although the current law requires a lot of conditions that a public company must meet for ESOP issuance, shareholders and company managers using ESOP to profit is not an big problem. Following the current Law on Enterprise, unless otherwise stipulated in the charter of the company, a resolution on the following matters shall be passed if it is agreed by a number of shareholders representing at least sixty five (65) per cent of the total number of voting slips of all attending shareholders.[3]

At this rate, minority shareholders find it difficult to oppose. Even, with the release of the additional ESOP, they will be directly affected by share dilution in the company, leading to the reduction of voting power, priority rights of buying shares… under the provisions of company law. To shed light on joint-stock company to many readers, share dilution here means that shareholders’ ownership in the company is reduced, or diluted when these new shares are issued despite the number of shares they hold remains unchanged, thereby significantly reducing the weight in voting power issues of the company and affecting other interests of shareholders concerning share ownership (priority of purchasing shares of new releases, nominating people to the board, inspection committee, requesting that a meeting of shareholders be convened…). For example, the new ABC joint-stock company is established with a charter capital of 100 million, corresponding to 10,000 ordinary shares. Mr. X is a founding shareholder holding 1,000 shares, accounting for 10% of the company’s shares, respectively, which contributes to 10 million capital contribution. After five years of operation, the ABC company decided to issue 2,000 additional ESOP stocks to the employees and increase the charter capital of the company to 120 million. Since Mr. X is not a company’s employee, as a result, he is not entitled to get ESOP. Hence, when finishing the ESOP issuance, even though Mr. X still owns 1,000 shares in the ABC company, but his ownership rate goes down from the initial 10% to 8.33%, and as much as the ESOP, his ownership percentage will be lower.

Apart from lowering shareholding ownership ratio, adding more shares to the market circulation at the issued price lower than the market price, without the proper restrictions will inadvertently affect the stock price. The year of 2019, can be seen as an intense period of market when a series of listed companies such as PAN (PAN Group Joint Stock Company), Novaland,… publish offer to sell ESOP shares in the form of the employee-choice program and then suspended, canceled owing to sharp decline in the stock price.[4]

2| Being taken advantage by company manager for their own profit

Under the current business law, the nature of ESOP is that the qualified employee will be entitled to purchase a certain amount of stock issued by a public company at a lower price than the market price at the time of release or the employee being rewarded to a certain amount of stock. Public companies will offset the difference between the actual amount obtained from the employee and the value of the selling stock from the valid revenues of the audited company.[5] ESOP beneficiaries will be selected depending on the company’s internal regulations, likely being employees, which, of course, have the titles of management.

The funds used to offset the difference between raising the charter capital in ESOP issuance will be paid from business profit by the company. Thus, the shareholders of the company indirectly pay with the profit which they deserve to obtain.

However, the authority to issue the standard and list of employees chosen to issue ESOP belongs to the Board of Management. Meanwhile, unless otherwise stipulated in the charter of the company, voting to elect members of the Board of Management and of the Inspection Committee must be implemented by the method of cumulative voting following the current enterprise law, most of the titles in the Board are hold by major shareholder. Therefore, under the circumstance where major shareholders want to increase the ownership rate within the company; the “arrangement” of employees who hold management roles are assigned to receive ESOP is not tricky. We are completely visible in many ESOP issuance cases of listed companies, the majority of ESOP shares offered for sale will be registered for purchase by individuals who take the role of company management (simultaneously being the shareholders of the company) or be rewarded.[6] In contrast, it is very difficult for affected shareholders to prove that the board of management is not transparent in choosing employees to apply the ESOP reward mechanism.

3| Shareholders’ agreement conflict

From the author’s experience, when making investments, professional investors often require the company shareholders to sign additional shareholders’ agreement in which, the terms “right of first refusal” or “anti-diluted right”– are very frequently included. However, ESOP is a case that is exempted from these terms, and not all investors pay attention to.

As a result, ESOP can fully become a detrimental tool to investor rights. In fact, there has been a case where an initial shareholder holding up to nearly 20% of share in a video game trading company contacted the author for legal advices because the major shareholders of the company are looking to push them out while the company is growing increasingly and attracting the eye of some major investors. Although there is anti-diluted clause in the original shareholder agreement, this anti-diluted clause does not apply to ESOP. That’s why the remaining shareholders who use ESOP to dilute the shareholding rate, with a remarkably consequent decline in this shareholder’s ownership rate after each application of the company’s ESOP, which leads to the incompetence to consider withdrawing their invested capital. As mentioned in section 1, reduction in equity ownership will significantly affect shareholders’ rights such as reduction in the percentage of newly released shares that the shareholder is entitled to purchase, reducing the weight of the voting rights in shareholder meeting, when the stock ownership rate dropped below 10%, shareholders could lose the right to convene a General Meeting of Shareholders, inspect, sight or consult transaction monitoring records, books of account and annual financial statements,…[7]

Ownership percentage is diluted, coupled with risks of reduced stock prices, and the failure to be transparent about the employee-choice mechanism are the top reasons many shareholders of listed companies don’t take kindly to ESOP. Even, then, the disputes arising about ESOP are increasingly popular and more complicated, and also expand on the subject of damage (employee, company, shareholder/investor) and the nature of the lawsuit over the past years. This also partly demonstrates how this movement has been become a poorly transparent profit tool.

With the financial benefits of business and incentives for employees, ESOP is a powerful tool to serve business activities. But after all, ESOP is just a business administrator’s tool and, its impact on the business is dependent on how ESOP is used, visionary people will employ and look at the encouraging benefit that ESOP brings to achieve the best performance for the company, shareholders and employees, while the ones with wicked intentions, only exploit it and put money into his pocket.

If you have any questions or require any additional information, please contact Apolat Legal – An International Law Firm in Viet Nam.

This article is for general information only and is not a substitute for legal advice.


[1] The Origin and History of the ESOP and Its Future Role as a Business Succession Tool –,successors%2C%20the%20managers%20and%20employees.

[2] Point 1 Part III Circular No. 19/2003/TT-BTC on treasury stocks

[3] Clause 1 Article 144 Law on Enterprises 2014

[4] Reference at

[5] Article 35 Circular No. 162/2015/TT-BTC

[6] Reference at

[7] Clause 8 Article 50 Law on Enterprises 2014

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