11 Aug 2022

THE EXCHANGE PUBLISHED CONSULTATION CONCLUSIONS ON SHARE SCHEMES OF LISTED ISSUERS

Background

On 29 July 2022, The Stock Exchange of Hong Kong Limited (the “Exchange”) published its consultation conclusions (the “Consultation Conclusions”) as to its proposed amendments to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) in relation to Share Schemes of Listed Issuers. As the current Chapter 17 of the Listing Rules only governs share option schemes of the listing issuers and their subsidiaries, the Exchange proposed to extend Chapter 17 of the Listing Rules to also include share award schemes. Majority of the responses from the public supported the Exchange’s proposals outlined in its “Consultation Paper on Proposed Amendments to Listing Rules relating to Share Schemes of Listed Issuers” (the “Consultation Paper”) on 29 October 2021.

This article follows up with our news update in November 2021 on the Exchange’s Consultation Paper (please see our news update here). The capitalised terms used herein shall have the same meanings as defined in the Consultation Conclusions and Consultation Paper.

The Exchange has adopted most of its proposals with some minor modifications to reflect the public’s responses. These minor modifications mainly relate to the role of the remuneration committee, vesting period for share awards and options, and share schemes of subsidiaries. The amended Chapter 17 of the Listing Rules will become effective from 1 January 2023. We encourage listed issuers to amend their Share Schemes before the effective date.

Summary of the key changes to the Listing Rules

The below table sets out a comparison between the current requirements under the Listing Rules and the final framework to be implemented:

Current Rules Revised Rules to be Implemented
Share Schemes Funded by Issuance of New Shares of Listed Issuers
1. Scope of Chapter 17 of the Listing Rules
Chapter 17 of the Listing Rules currently governs share option schemes only. • Proposal adopted to extend Chapter 17 of the Listing Rules to govern all Share Schemes involving grants of share awards and grants of options over new shares of issuers.

(MB Rule 17.01 / GEM Rule 23.01)

2. Eligible participants of Share Schemes
• No restriction on the categories of eligible participants. • Proposal adopted by defining “eligible participants” of Share Schemes to include Employee Participants, Related Entity Participants and Service Providers, with minor changes to the proposed definition of “Service Providers”, which professional advisors or experts who provide assurance, or are required to perform their services with impartiality and objectivity, are to be excluded from the definition of Service Providers.

(MB Rule 17.03A/ GEM Rule 23.03A)
• Proposal NOT adopted: to require approval by the remuneration committee of Share Grants to Related Entity Participants and Service Providers and other related matters (e.g. Service Provider Sublimit). These matters will continue to be approved by the Board. Remuneration committee would be required to approve matters relating to Share Grants to the issuer’s directors and senior management only.

3. Scheme mandate
• The grants of share options from all share option schemes are limited to 10% of the total issued shares of the issuers.

• Issuers may seek shareholders’ approval to refresh the scheme mandate at any time if the options outstanding do not exceed the 30% of its total issued shares.

Proposal adopted:

• Apply a Scheme Mandate Limit of not exceeding 10% of an issuer’s issued shares to Share Grants under all Share Schemes of the issuer which may be refreshed by shareholders’ approval once every three years, and to require independent shareholders’ approval for refreshment of scheme mandate within a three-year period.

(MB Rules 17.03(3), 17.03B(1) and 17.03C(1) / GEM Rules 23.03(3), 23.03B(1) and 23.03C(1))

• Require the issuer to set a service provider sublimit within the Scheme Mandate Limit and disclose the basis for determining the sublimit in its circular to shareholders.

(MB Rules 17.03(3) and 17.03B(2) / GEM Rules 23.03(3) and 23.03B(2))

• Remove the current requirement that the number of outstanding options should not exceed 30% of the issued shares from time to time.

4. Minimum vesting period for Share Grants
• Do not have specific requirements on vesting period. Proposal adopted with modifications:

• Require a minimum vesting period of 12 months.

• The board of directors, at its discretion, shall permit a shorter vesting period if it is Share Grants made to Employee Participants, provided that:

(a) the scheme document sets out the specific circumstances where the vesting period for Share Grants to Employee Participants can be shortened;

(b) the board of directors (and the remuneration committee where the specific circumstances may apply to grants to directors and senior management) to explain why a shorter vesting period is appropriate and how the grants align with the purpose of the scheme; and

(c) the grant announcement states the relevant circumstances that are specifically permitted by the scheme when a Share Grant is made with a shorter vesting period. Where the Share Grants are made to the issuer’s directors and senior management, the remuneration committee’s views on why a shorter vesting period is appropriate.

(Note to MB Rules 17.03(6) and 17.03F / Note to GEM Rules 23.03(6) and 23.03F)

5. Performance targets and clawback mechanism
• Require issuer to disclose in the scheme documents any performance targets attached to share grants or a negative statement.
• No specific disclosure requirement relating to a clawback mechanism.

Proposal adopted with modifications:

• The scheme document must include a description of the performance targets (which may be qualitative) attached to awards or options to be granted under the scheme, if any, and if none, a negative statement to that effect. In addition, where the issuer has established a clawback mechanism to recover or withhold the remuneration to any participants, the scheme document must include a description of the clawback mechanism or, if none, a negative statement to that effect.

• Issuers would be required to disclose in their grant announcements the performance targets (which may be qualitative) and clawback mechanisms attached to Share Grants, if any. Where Share Grants are made to any directors and senior management without performance targets and/or clawback mechanism, the grant announcement must disclose the remuneration committee’s views on why they are not required and how the grants align with the purpose of the scheme.

(MB Rules 17.03(7), 17.03(19) and 17.06B(8) / GEM Rules 23.03(7), 23.03(19) and 23.06B(8))

6. Exercise price or share grant price
• The exercise price of share options must not be less than market price of the shares at the time of grant. • Proposal adopted to retain the current restriction on the exercise price of share options. No restriction on share grant price for grants of new shares under share award schemes.

(MB Rule 17.03E / GEM Rule 23.03E)

7. Restrictions on large share grants to individual participants and share grants to connected persons
Share option schemes
• For individual grantee: shareholders’ approval if grants of options in excess of 1% of issued shares over a 12- month period.
• For director (other than an INED), or chief executive: approval by INEDs.
• For (i) eligible participant who is a substantial shareholder and (ii) INED: (a) approval by INEDs (excluding any INED who is the grantee); or (b) independent shareholders’ approval for grants of options in excess of 0.1% of issued shares and HK$5 million over a 12-month period.

Share award schemes>
• For individual grantee: No specific limit.
• For director, chief executive and eligible participant who is a substantial shareholder:shareholders’ approval for any grant of share awards involving new shares.

For all Share Schemes

• For individual grantee: Proposal adopted to require shareholders’ approval if grants of share awards and share options in aggregate to an individual participant exceed of 1% of issued shares over a 12- month period.

(MB Rule 17.03D/ GEM Rule 23.03D)

• For director (other than an INED), or chief executive: Proposal modified:

(a) subject to (b), INEDs’ approval; or

(b) independent shareholders’ approval if the grants of share awards cause the share awards granted to exceed 0.1% of the total issued shares over any 12-month period.

• For (i) eligible participant who is a substantial shareholder and (ii) INED: Proposal modified:

(a) Subject to (b), INEDs’ approval; or

(b) independent shareholders’ approval if the grants of share awards and share options in aggregate exceed 0.1% of the total issued shares over any 12- month period.

(MB Rule 17.04/ GEM Rule 23.04)
• Proposal adopted to remove the HK$5 million de minimis threshold for grants of share options to an INED or substantial shareholder of the issuer.

Share Schemes funded by existing shares of listed issuers
8. Disclosure in grant announcements and financial reports
• Share award schemes which are funded by existing shares purchased on-market do not require shareholders’ approval.
• Disclosure about these schemes is governed by accounting standards.
• Proposal NOT adopted: the requirement for announcement of share grants involving existing shares

• Proposal adopted: require disclosure in annual reports of grants of existing shares to (i) directors on an individual basis; and (ii) five highest paid individuals in aggregate. Details of grants to other participants can be disclosed on an aggregated basis.

(MB Rule 17.01(1)(b) / GEM Rule 23.01(1)(b))

Share Schemes of subsidiaries of listed issuers
9. Share award schemes of subsidiaries
• Govern share option schemes of subsidiaries. • Proposal modified where Chapter 17 will be extended to govern Share Schemes of principal subsidiaries (i.e. subsidiaries whose revenue, profit or total assets accounted for 75% or more of that of the issuer under the percentage ratios in any of the latest 3 financial years), and not of other subsidiaries.

(MB Rules 17.13 to 17.15 / GEM Rules 23.13 to 23.15)

• Share Grants under Share Schemes of other subsidiaries will be subject to Chapters 14 and/or 14A requirements.

Transitional Arrangements
Transitional arrangements shall be provided for existing Share Schemes that are valid as at 1 January 2023. In summary:

  • (a) The new disclosure requirements would take effect from 1 January 2023 for all existing Share Schemes as at the same date. Listed issuers may make Share Grants only to eligible participants (as defined in the amended Chapter 17) for financial years commencing on or after 1 January 2023.
  • (b) For share option schemes or share award schemes adopted by listed issuers before 1 January 2023, the issuers may continue to make Share Grants to eligible participants (as defined in the amended Chapter 17) using their existing scheme mandates or Advanced Mandates. Issuers which have adopted share award schemes using general mandate may make Share Grants up to the date of the second annual general meeting after 1 January 2023.

Analysis and Takeaways
Share Schemes are commonly used by listed issuers to reward and incentivise their employees and service providers. It represents a move for the Exchange to align the Listing Rules treatment in respect of share options schemes and share award schemes. We are positive that the implementation of the amended Chapter 17 of the Listing Rules can provide flexibility and clarity to listed issuers in formulating their Share Schemes and enhance disclosure of the Share Schemes to the shareholders and investors.

This article is co-authored by our Partner of Corporate Finance Department, Mr. Rodney Teoh, Associate, Ms. Angela Lau, and Trainee Solicitor, Ms. Jess Chung. Please contact our Partner Mr. Rodney Teoh for any enquiries or further information.

This newsletter is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage arising from or in connection with any decision made, action or inaction taken in reliance on the information set out herein.