This bilingual article looks at how disputes relating to stocks or stock options granted to employees may now be treated as a labour dispute rather than a contractual dispute.
To date in China, disputes relating to stocks or stock options granted to employees have normally been deemed to be contractual disputes, rather than labor disputes. Labor dispute arbitration committees or labor courts generally do not accept such cases and the parties are required to file claims with a court hearing contractual disputes.
However, reports indicate that in September, 2017, a local court in Shenzhen issued a verdict in which it viewed a restricted stocks dispute as a labor dispute and made a decision accordingly. It appears that this is the first time in China for a dispute of this kind to be accepted and heard as a labor dispute.
A brief background of the case is that an employee had worked in a company for nearly ten years and held an open-end term employment contract. The company had granted restricted stocks to the employee as one of the incentives. The restricted stocks were scheduled to vest in three installments. Subsequently, but before the first vesting date, the employee was terminated by the Company for “serious violation of company rules". After the termination, the company cancelled all entitlements to and de-registered all restricted stocks.
The employee filed a labor dispute arbitration and claimed compensation from the company for both “wrongful termination” and “loss caused by the company cancelling and de-registering the restricted stocks.” The labor arbitration committee supported the employee’s claim for wrongful termination, but rejected the claim to recover the purported losses in relation to stock on the basis that this was not a labor dispute.
The employee was not satisfied with the result and filed the case with the local court in Shenzhen. The local court finally determined that the company should compensate the employee for part of the loss of the restricted stock opportunities in addition to the compensation for wrongful termination.
According to the reports, the court looked at the purposes and nature of the restricted stock when considering whether to accept the claim as a labor dispute. In particular, they took the following three factors into consideration: (i) the reasons for the employee to be granted the restricted stock entitlement; (ii) the conditions for trading of these restricted stocks; and (iii) whether the benefit from the restricted stock should be deemed as part of the employee’s benefits under the employment. The court further added that including such claims into the scope of labor disputes would be helpful for better dealing with this kinds of disputes as well as for protecting the rights of employees.
While China does not have a system of binding case law precedent, and courts in different locations may adopt different approaches, this case has attracted significant attention nationwide. Shenzhen is a city known as a technology and innovation hub in China, with a lot of technology companies having their China headquarters registered there. And issuing stocks or stock options based incentives to employees is increasingly common practice adopted for start-ups and high-tech companies. It is therefore expected that more cases of a similar nature may now be heard by labor courts in Shenzhen. And while the courts in other major cities, such as Beijing and Shanghai, typically have refused to hear employee stock related cases as labor disputes, it is possible that this Shenzhen case may be considered in other places and that courts elsewhere may adopt a similar and more flexible approach.
The implication of such cases being heard as labour disputes is that the overall process generally is much quicker than for hearing a contractual dispute. Hearings are scheduled sooner and the courts tend to issue their decisions more quickly. This gives less time for companies to prepare evidence. In addition, the judges tend to take a pro-employee approach when deciding labor disputes and the employer normally bears a heavier burden of proof in labour cases. Fact patterns may differ from case to case, but we believe that employees generally will have a better chance of success in stock plan related claims if these are heard as labour disputes.
Stock plans can be an important incentive for employees. However, companies are advised to review their stock plans or stock options plans from time to time and see whether any necessary changes are required or desirable. For example: to consider whether to change the issuing entity of the stocks from a PRC company to the overseas parent company; and whether to adjust or tighten the terms and conditions of stock plans so that the company has more rights and flexibility in case it chooses to withdraw entitlements for specific reasons, such as in the context of termination.
This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.
Simmons & Simmons is registered in China as a foreign law firm. We are permitted by Chinese regulations to provide information on the impact of the Chinese legal environment and also to provide a range of other services. We are not admitted to practise in China and cannot, and do not purport to, provide Chinese legal services. We are, however, able to co-ordinate with local counsel to issue a formal legal opinion should this be required.