introduction

Equity incentive is a double-edged sword, which plays a positive role in attracting, retaining and motivating talent, improving the company's performance and improving the company's core competitiveness, but may also bring risks to the company. For example, during the implementation of equity incentive or when terminating an equity incentive plan, it is easy to cause disputes between the company and the incentive recipients, and even lead to labor arbitration or litigation cases, so that the company and the incentive recipients are caught in litigation. Under normal circumstances, the target of equity incentive is mainly for directors, senior management, core technical personnel, core sales personnel who sign labor contracts with the company, and some companies also take other key personnel, middle managers, grass-roots supervisors and even all employees of the company as incentive objects. By analyzing the litigation cases related to equity incentives, this article will discuss how to characterize the dispute cases arising from equity incentives between the company and the incentive recipients with employee status (hereinafter referred to as "incentive targets") in the implementation of equity incentives, that is, whether such cases are labor disputes.

First, why qualitative

In the process of implementing equity incentives, there is a dual legal relationship between the company and the incentive recipient, one is the ordinary commercial contract relationship between equal subjects, and the other is the labor relationship between the employer and the employee. If a dispute arises during the implementation of equity incentives, or even goes to court, the first thing to confirm is whether the dispute is a contract dispute or other dispute (hereinafter collectively referred to as "non-labor disputes") or a labor dispute. This is because:

(1) The judicial procedures applicable to dispute resolution are different

Labor dispute cases shall be subject to the pre-labor arbitration procedures, which shall first be accepted and adjudicated by the Labor Dispute Arbitration Commission, and if the arbitration commission fails to accept the case or a party is dissatisfied with the arbitration result, it can file a lawsuit in court; For non-labor dispute cases, one party can directly file a lawsuit in the people's court without going through the pre-labor arbitration procedure. Therefore, under normal circumstances, labor dispute cases have more procedures, take longer time, and cause more litigation burden to the parties than non-labor dispute civil and commercial cases.

(2) The applicable law is different

Labor disputes are regulated by the Labor Law, the Labor Contract Law and other relevant laws, while the relevant laws of the Labor Law belong to the category of social law and legal departments, and the adjustment is labor relations, with emphasis on the protection of workers. Civil and commercial cases of non-labor disputes shall be subject to the Contract Law, Company Law and other relevant legal adjustments according to the specific circumstances of the case, which belong to the scope of the civil and commercial law legal department, and adjust the civil and commercial legal relationship between equal subjects.

(3) The burden of proof is different

The relevant provisions of China's labor law tend to protect workers in a weaker position, so labor dispute litigation cases increase the burden of proof on employers to some extent. For civil and commercial cases involving non-labor disputes, because they are disputes between equal subjects, the distribution of the burden of proof is also relatively equal.

Second, a case study on how to qualify

(1) Cases and analyses that are regarded as labor disputes

Case 1: Guangzhou Xueba Special Equipment Co., Ltd. and Panqihai labor dispute case - Guangzhou Intermediate Court [(2018) Yue 01 Min Zhong No. 18263]

1, the basic facts of the case

The plaintant, Xueba, filed a lawsuit alleging that the defendant Pan Qihai had established an employment relationship with Xueba since May 1, 2016, and resigned on March 31, 2018. Pan Qihai served as the head of the development department and mastered the technical data and customer information of the plaintiff Xueba. In order to motivate the company's executives, Xueba Company gave Panqihai the right to dividend 5% of its shares, and agreed that it shall not work part-time in a company other than Xueba, and shall not operate commercial activities that compete with Xueba. During his tenure, Pan Qihai established Xionghai Company with outsiders, enjoying 48.5% of the company's equity and serving as the company's manager. After investigation, Xionghai Company and Xueba Company formed a competitive relationship in the same industry. As a result, Xueba Company sued the court, requesting that Pan Qihai be ordered to return the equity dividends to Xueba Company and compensate for the corresponding losses.

The Nansha District People's Court of Guangzhou Municipality, the court of first instance, held that, combined with the provisions of Xueba's "Company Equity Incentive System" and Xueba's claims, Pan Qihai obtained incentive equity based on his work performance, but only enjoyed the right to dividends, did not enjoy the right to participate in major decisions, the right to choose managers, etc., and was not allowed to sell or transfer equity, so he was not a shareholder under the Company Law. The "Company's Equity Incentive System" stipulates that the dividends involved in the case are used to motivate employees who have contributed to the company, and stipulates the performance of dividends and non-compete and other breach of contract liabilities. In actual operation, Xueba Company calculates and pays specific dividends according to Pan Qihai's work assessment, which shows that the dividend reward is based on the labor relationship between the two parties, and should be regarded as an additional labor remuneration in addition to the basic salary obtained by Pan Qihai working in Xueba. Xueba's request for Panqihai to return the dividend payment and compensate for losses on the grounds that Pan Qihai violated the company's equity incentive system and infringed the company's legitimate rights and interests should be a labor dispute. However, Xueba Company did not have a preliminary procedure for labor dispute arbitration, so the court of first instance ruled to dismiss Xueba's lawsuit.

The Guangzhou Intermediate Court of the court of second instance upheld the original ruling.

2, case summary

The incentive targets in this case are not shareholders registered with the Administration for Industry and Commerce as stipulated in the Company Law in the true sense. The company grants virtual equity to the incentive recipients, which does not require capital contribution from the holder, and the holder does not enjoy equity ownership, nor does it enjoy important shareholder rights such as voting rights, major decision-making participation rights, and management selection rights, but only enjoys the right to dividends separated from equity ownership. At present, the mainstream view in judicial practice tends to believe that in this virtual equity incentive model, the incentive target does not actually own the company's equity and cannot become a shareholder, labor relationship is the premise of the company's implementation of equity incentives, and the dividend right granted to employees by virtual equity should be a component of labor remuneration, which is closely related to the employee's identity and position, working years, work performance and other factors. Therefore, the disputes arising therefrom should fall within the scope of labor disputes.

The dispute between Pan Xianxianhe and Beijing Libo Garment Co., Ltd. over shareholders' right to know [(2016) Jing 0107 Minchu No. 6442] heard by the Beijing Shijingshan Court, and the dispute between Company A and A over a labor contract heard by the Shanghai First Intermediate Court [(2013) Hu Yi Zhong Min San (Min)Zhong Zi No. 198] and Shanghai Zhishang Garment Co., Ltd. v. Li Gang Recourse Labor Remuneration Dispute [(2018) Hu 01 Min Zhong No. 6881] and other cases hold this view.]

So, under what circumstances should disputes arising from equity incentives not be regarded as labor disputes? Let's look at the following example.

(2) Cases and analysis of other disputes such as contract disputes

Case 2: Contract dispute between Fu Jun and Taobao (China) Software Co., Ltd. and Alibaba Group Holding Co., Ltd. - Zhejiang High Court [(2016) Zhejiang Min Zhong No. 504]

1, the basic facts of the case

During the existence of the labor relationship between the two parties, Fu Jun and Ali Group signed the "2005 Share Incentive Plan", "2005 Share Incentive Plan Grant Notice", "2007 Share Incentive Plan" and "2007 Share Incentive Plan Grant Notice", and were granted stock options of Alibaba Group ,800 shares, of which 70,400 shares have been exercised. Later, because Fu Jun violated the business code of conduct of Ali Group, he was canceled by Ali Group. As a result, Fu Jun filed a lawsuit with the Hangzhou Intermediate People's Court, requesting the court to order Taobao Software and Alibaba Group to deliver 35,400 shares of Alibaba Group to Fu Jun and go through the relevant registration procedures.

Fu Jun said that stock options are the benefits obtained by Fu Jun from working in Taobao Software Company, are part of the salary and benefits of employees, and cannot be arbitrarily deprived unless there are statutory circumstances. In this case, there was no evidence to prove that Fu Jun had seriously violated the company's rules and regulations, and that the stock options that had been exercised had been converted into the right to actually hold shares, and Taobao Software and Alibaba Group had no legitimate reason to deprive them. The option plan and the code of conduct on which the expropriation of equity is based have not been discussed and approved by the employee representative assembly or all employees, and are not binding on the military. Therefore, there is no factual and legal basis for Taobao Software and Alibaba Group to cancel Fu Jun's stock options.

The Hangzhou Intermediate Court, the court of first instance, held that Alibaba Group was a legal person in the British Cayman Islands, and the case was a foreign-related contract dispute on the grounds that the parties had established a legal relationship in connection with the stock option grant contract. The stock option incentive system is a modern corporate governance system. In a company that implements the stock option incentive system, through the signing of relevant agreements between the company and employees, the company grants employees the qualification to purchase the company's equity at a predetermined price and conditions within a certain period of time in the future as a property incentive, aiming to promote the establishment of an incentive mechanism between the company and employees based on the right to share performance benefits, link the interests of the incentive targets with the company's benefits, form a community of interests, and urge the incentive targets to treat the company's interests as their own. So as to contribute the maximum personal value to the company. First of all, the property income involved in stock options is not the labor remuneration of employees' wages, bonuses, and benefits. As an employee, Fu Jun has been paid for labor by providing labor from the employer Taobao Software Company. In exchange for Fu Jun's enthusiasm and loyalty to Taobao Software Company and Alibaba Group, Alibaba Group provided stock option incentives to Fu Jun, which was a contract consideration given to Fu Jun to bear the above obligations in addition to his normal labor obligations. Therefore, the property income brought by stock options is not labor remuneration; SSecond, the rights and obligations constructed by both parties in the stock option grant contract are not rights and obligations in the employment contract. Although the reason why Alibaba Group provides stock option incentives to Fu Jun is that Fu Jun has an employment relationship with its Taobao Software Company, and from the perspective of the stock option incentive construction model, Alibaba Group has replaced Taobao Software Company's status as an employer, but the rights and obligations set by Alibaba Group and Fu Jun in stock option incentives are not the legal rights and obligations of employers or affiliated companies under the labor law, nor are they rights and obligations set by employees in seeking labor opportunities and exercising labor rights; TThird, the stock option grant contract signed by the two parties for stock option incentive should be an ordinary commercial contract between equal subjects. First, the labor relationship between Fu Jun and the affiliated enterprises of Ali Group is a condition for Ali Group to select the object of the offer as the issuer of the offer, and this restriction on the object of the offer does not automatically lead to the unequal contractual status of the two parties. Second, from the signing and performance process of the contract, Fu Jun can choose to accept or not accept the stock options granted, and can also choose to purchase or not purchase before the exercise deadline after acceptance, and Fu Jun's expression of intention as an offeree is not subject to identity-related restrictions. Third, from the content of the rights and obligations stipulated in the contract, Ali Group grants shares at preferential prices to give Fu Jun property incentives, and Fu Jun performs loyalty obligations to Alibaba Group and its company, which is the core content of the rights and obligations of both parties in stock option incentives, which is reciprocal. Accordingly, the court of first instance held that this case was a contract dispute and that the laws and regulations regulating the contractual relationship between equal civil subjects should apply. Accordingly, the court of first instance dismissed Fu Jun's claim.

Fu Jun appealed against the judgment of the court of first instance to the Zhejiang High Court. The Zhejiang High Court accepted the view of the court of first instance, and also found that the case was a foreign-related contract dispute, and dismissed the appeal and upheld the original judgment.

2, case summary

The most important difference between this case and Case 1 is that the equity incentive model in this case is a real stock incentive. The incentive target is granted stock options, and this real stock incentive model actually has complete equity ownership after the incentive target exercises the right and has the identity of a shareholder in the true sense. In essence, although in this real stock incentive model, the determination of incentive targets is often premised on their employee status, but its essence is to transfer equity to incentive targets under certain conditions (such as the incentive targets meet the company's performance appraisal and personal performance appraisal conditions) at a more favorable price and higher priority opportunities, so as to obtain the enthusiasm and loyalty of the incentive targets to the company and create more value for the company , not remuneration for labor. From a formal point of view, in the process of the implementation of real stock incentives, the company often grants incentive equity to incentive targets by signing contract documents such as "Equity Grant Agreement" and "Equity Transfer Agreement" with employees, and the status between the company and the incentive targets is a more equal relationship than the labor contract relationship, and the incentive targets enjoy a freer choice than employees in the implementation of equity incentives. Therefore, at present, the mainstream view in judicial practice tends to hold that under the actual stock incentive model, the dispute between the company and the incentive target caused by the actual stock incentive is not a labor dispute, but should be characterized as a contract dispute, equity transfer dispute or securities dispute according to the actual situation of the case.

The Supreme People's Court heard the contract dispute between Soufang Holdings Co., Ltd. and Sun Baoyun [(2013) Min Shen Zi No. 739], the Sichuan High Court heard the equity transfer dispute between Zhou Jianqi and Xie Changhui [(2017) Chuan Min Shen No. 4496], and the Guangdong High Court heard the contract dispute appeal case between Cao Lin and Fuana Company [( 2014) Yue Gao Fa Min Er Shen Zi No. 946] and other cases hold this view.

III. Conclusion

The determination of equity incentive targets is often based on the premise that the incentive targets are employees of the company, so equity incentive disputes are naturally easy to be confused with labor disputes, but the two are different. As the Guangdong High Court found in the appeal case of the contract dispute between Cao Lin and Fu Ana Company, the establishment and survival of the labor contract relationship between the incentive target and the company affects the establishment and survival of the equity relationship between the incentive target and the company. However, the labor contract relationship and the equity relationship belong to two independent and different legal relationships, with different rights and obligations, and should not be confused. The author also believes that to analyze whether the dispute between the company and the incentive target in the implementation of equity incentive is a labor dispute or other type of dispute, we should analyze the essence of the dispute through the phenomenon, start from the essential difference between labor relationship and equity relationship, and consider it comprehensively. TThe above-mentioned cases distinguish the nature of the dispute case by the real stock model and the virtual share model, and it is precisely from the most important aspect of the two that are distinguished, that is, from the judgment of whether the incentive target is a pure worker or a real shareholder, and the content of the rights and obligations of the two. Although there are still some differences in the current judicial precedents regarding the nature of disputes arising from equity incentives between companies and incentive recipients, the mainstream view generally tends to believe that under the fictitious stock incentive model, the dispute between the company and the incentive target caused by equity incentive is a labor dispute, whereas under the actual stock incentive model, the equity incentive dispute between the company and the incentive target is a non-labor dispute. However, due to factors such as the absence of legal provisions, the inconsistency of judicial practice, and the complexity of individual cases, it is suggested that while using the method of distinguishing between fictitious and real stock incentive models as an important criterion for the characterization of equity incentive dispute cases, it is also necessary to comprehensively confirm and judge the nature of the case in combination with the identity of the incentive recipient, the nature of the equity incentive dividends, and the rights and obligations in the equity incentive related contracts, so as to avoid unnecessary litigation burdens and economic and time losses caused by misjudgment.

(This article is translated by software translator for reference only.)