New SAFE Circular 7—What Does It Mean For Your Company?

In April 2007, the State Administration of Foreign Exchange ("SAFE") in the People's Republic of China ("PRC") issued Circular 78, which required non-PRC public companies to receive exchange control approval from SAFE in connection with grants of certain types of equity awards and offers of stock to PRC nationals in China under their stock incentive and employee stock purchase plans. Just as multinational companies were becoming more proficient at navigating the SAFE approval process (and SAFE officials were simultaneously becoming more efficient in their review of applications), SAFE circulated new Circular 7 at the end of February (officially known as the Circular of the State Administration of Foreign Exchange on Issues of Foreign Exchange Administration of Domestic Individual Participation in Stock Option Incentive Plans of Companies Listed Overseas). Circular 7 supersedes Circular 78 in its entirety and immediately became effective upon circulation. Circular 7 does not completely revamp the SAFE approval process. However, it does introduce a number of changes to both the application process and ongoing compliance requirements. Some of the modifications that simplify the application itself will be welcomed by many corporations that have not yet filed for approval, whereas other changes will increase the compliance burden for those companies that have already received approval and for those that receive approval in the future. This Commentary summarizes the major changes to the SAFE approval and ongoing compliance processes introduced by Circular 7 and their effect on those multinational companies that have not yet filed for approval, those corporations that have received SAFE approval for their equity issuances to PRC nationals in China, and those companies whose applications are currently under review by SAFE. If you have any questions about Circular 7 or need any assistance with any stage of the SAFE approval or ongoing compliance process, please contact one of the Jones Day authors listed below.

CIRCULAR 7 REQUIREMENTS

Although Circular 7 has not radically altered the initial SAFE approval process or ongoing corporate compliance obligations, it has broadened the SAFE requirements to include:

A wider variety of equity awards, including phantom stock; More entities, including branch or representative offices of multinational corporations in China; and Non-PRC expatriates and citizens working in the PRC, including Hong Kong, Macau, and Taiwanese citizens. Furthermore, Circular 7 shortens the submission deadline for quarterly reports and requires registered companies to amend their registrations in the event of a termination of the...