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. Last Updated: 07/27/2016

Stock Option Plan Can Reward, Keep Workers

Employee stock option plans, or ESOPs, are becoming popular in Russia as a way to create incentives for improving employee productivity and increasing employee loyalty.

Under a typical ESOP, the employer, who is the issuer of publicly traded stock, allocates a certain amount of stock for future distribution to its employees as a bonus. At the inception of the ESOP, eligible employees are given options to purchase the employer's stock at a certain price. Some ESOPs may provide for a restricted period when employees may not exercise their right to buy the stock: These options are called "unvested." The restricted pre-exercise period may last from several months to several years.

Most commonly, employers issue unvested employee stock options and establish certain eligibility criteria for the employees before the options becomes exercizable. These criteria may include the requirement to work for a certain period, accomplish a specified goal, or remain at a non-managerial position within the company. Thus, these options are not transferable or alienable. Of course, the employee does not have to consent to the plan and may simply refuse to participate.

By establishing an ESOP, the employer accomplishes the following goals: (1) valuable employees are encouraged to stay at their place of employment; (2) participating employees are personally interested in increasing the future value of the stock and consequently the success of the employer; and (3) part of the compensation is paid in stock and not in cash and occurs in the future.

Due to the undeveloped nature of Russian securities laws, Russian companies have experimented with ESOP schemes with varying degrees of success. The Joint-Stock Company Law prohibits a Russian issuer from holding its own stock for longer than a year. Thus, unvested options may not be exercised later than one year from the date of issue. Further, before the options are exercised and placed, the employer may not issue other stock until the previous offering is closed (such as stock issued for the ESOP). Finally, if the ESOP securities issue is closed, the securities must be placed, i.e. distributed to new owners, before the exercise of the options by the employees.

Currently, the ESOPs offered by foreign issuers to Russian resident employees are practically not feasible due to restrictions under the currency, banking and the securities laws. For example, under the Securities Law the options must be registered and the prospectus must be issued. Because Russian residents may not own foreign bank or stock accounts and may not purchase foreign issued stock without the Central Bank of Russia's authorization, eligible employees must apply for a Central Bank license before receiving or exercising the options.

Peter Malyshev is a securities attorney with Baker & McKenzie.