A closer look at Restricted Share Plans

RSPs are a specific kind of equity compensation where employees receive company shares as part of their compensation package. These shares come with conditions: they either need time or certain achievements before employees fully own them. Additionally, there might be limitations on selling or transferring these shares, such as a holding period or the company’s right to refuse the transfer.

RSPs differ from stock options, which grant the right to buy shares at a set price in the future. Unlike stock options that become worthless if the stock price drops, restricted shares maintain value even if the stock price falls. However, there’s more risk involved with restricted shares – employees might lose them if they don’t meet the ownership conditions or violate transfer restrictions.

Some key concepts are essential to understand when dealing with restricted shares, such as:

• Fair Market Value (FMV): This is the share price in an open market, determined by stock supply and demand. FMV is typically based on the stock’s closing price during grant, vesting, or sale.
• Grant Date: The day the company awards restricted shares, establishing the plan’s terms.
• Vesting Date: When employees meet vesting conditions and gain full ownership of shares. It can be a fixed date, a series, or linked to specific events like an IPO or merger.
• Vesting Schedule: The timetable dictating when and how shares vest. It can be “cliff vesting” (all at once after a set period) or “graded vesting” (gradual portions over time).
• Taxation: Involves determining and paying taxes arising from restricted share grants, vesting, and sale. Taxation specifics depend on factors like share type, timing, FMV, and relevant tax laws.

There are two main types of RSPs: restricted stock awards (RSAs) and restricted stock units (RSUs). Both are forms of restricted stock, but there are some key differences between them.

In Malaysia, restricted share plans are typically crafted and overseen by the employer, aligning with the company’s compensation strategy. The employer defines eligibility criteria, the quantity and value of granted shares, the vesting schedule, transfer restrictions, and the tax treatment of the plan.

The employer reserves the right to modify, amend, or terminate the plan, guided by the plan’s terms and relevant laws. Additionally, the employer may exercise discretion to expedite or waive vesting or transfer restrictions under specific circumstances, such as a change of control, termination, or the employee’s death or disability.

Upon receiving the grant, the employee must accept and adhere to the plan’s terms. If applicable, the employee may need to pay a purchase price for the shares. Compliance with vesting and transfer restrictions is mandatory, and the employee is responsible for reporting and settling any taxes associated with the plan.