17 Nov 2021

THE HONG KONG EXCHANGE CONSULTS ON PROPOSED LISTING RULES AMENDMENTS RELATING TO LISTED ISSUER SHARE SCHEMES

Introduction

On 29 October 2021, The Stock Exchange of Hong Kong Limited (the “Exchange”) published a consultation paper (the “Consultation Paper”) on Proposed Amendments to Listing Rules relating to Share Schemes of Listed Issuers.  In particular, since Chapter 17 of the Listing Rules currently only governs share option schemes, the Exchange seeks to amend Chapter 17 to also include share award schemes by issue of new shares, taking into consideration of the increasing adoption thereof by issuers and their subsidiaries.  The Exchange is seeking market feedback on its proposals by 31 December 2021.

Background

Traditionally, listed issuers use share option schemes and share award schemes (collectively, the “Share Schemes”) as equity-based awards to attract, retain and motivate employees and service providers.  They are used to align the interests of the participants with those of issuers and shareholders.  Generally speaking, share option schemes are funded by issuance of new shares by the issuers and share award schemes can be funded by new shares or existing shares of the issuers purchased on-market.  A vast majority of issuers on the Exchange have adopted Share Schemes.

Currently, Chapter 17 of the Listing Rules, which was last amended in 2000, governs share option schemes of the listed issuers and their subsidiaries.  On the other hand, there is no existing Listing Rules that specifically govern share award schemes.  Instead, they are subject to Chapter 13 of the Listing Rules, which governs the issuance of securities in general, as well as Chapter 14A of the Listing Rules if the grants of new shares are to connected persons.  In fact, if the share award schemes are funded by existing shares of the listed issuers, shareholders’ approval is not required as it would not have any dilution effects on the existing shareholders of the issuers.

In the Consultation Paper, the Exchange is taking the opportunity to review Chapter 17 of the Listing Rules to include share award schemes.  The proposals place more importance on the role of the remuneration committee in reviewing, supervising, overseeing the operation of Share Schemes.

Key Proposals relating to Share Schemes of Listed Issuers

The below table sets out a comparison between the current requirement under the Listing Rules and the key proposals to establish the framework for the Share Schemes set out in the Consultation Paper:

  Current Rules Proposals
Share Schemes funded by issuance of new shares of listed issuers
Chapter 17 of the Listing Rules
  • Chapter 17 currently governs share option schemes only.
  • Proposes to extend Chapter 17 to also govern share award schemes funded by issue of new shares.
Eligible participants of Share Schemes
  • No restriction on the categories of eligible participants.
  • Defines “eligible participants” of Share Schemes to include the following:

(a)            Employee Participants: directors and employees of the issuer or any of its subsidiaries;

(b)            Related Entity Participants: directors and employees of related entities (i.e. the holding companies, fellow subsidiaries or associated companies of the issuer); and

(c)            Service Providers: other persons who provide services to the issuer group in its ordinary and usual course of business which are material to its long-term growth and on a continuing and recurring basis (e.g. independent contractors, consultants and advisors to biotech companies).

  • The share grants to Related Entity Participants and Service Providers must be approved by the remuneration committee.
Scheme mandate Limit on 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.
  • Applies a scheme mandate limit of not exceeding 10% of an issuer’s issued shares to all Share Schemes involving issuance of new shares (the “Scheme Mandate Limit”).  The Scheme Mandate Limit might be refreshed once every three years.
  • Requires independent shareholders’ approval for additional refreshments within a three-year period.
  • Proposes to remove the 30% limit requirement.
  • Sets a sublimit within the Scheme Mandate Limit on share grants to Service Providers.
Minimum vesting period
  • Does not have specific requirements on vesting period.
  • Requires a minimum vesting period of 12 months. The period can only be shortened if it is approved by the remuneration committee in respect of share grants made to Employee Participants who are identified by the issuer.
Performance targets and clawback mechanism
  • Requires 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.
  • Requires performance targets and clawback mechanism for all share grants and the disclosure thereof in the grant announcements.
  • If no performance targets and/or a clawback mechanism, the grant announcement and circular must set out the remuneration committee’s views addressing why performance targets and/or a clawback mechanism is/are not necessary.
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.
  • Retains the current restriction on the exercise price of share options.
  • For grants of shares under share award schemes: does not propose to impose any restriction on share grant price.
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 independent non-executive director (the “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 Scheme Schemes

  • For individual grantee:  shareholders’ approval if the grants of share awards and share options in aggregate exceed 1% of the total issued shares over any 12- month period.
  • For director (other than an INED), or chief executive: (a) subject to (b), remuneration committee’s 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: (a) Subject to (b), remuneration committee’s 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.
Share Schemes funded by existing shares of listed issuers
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.
  • Requires disclosure of the terms and details of the share schemes funded by existing shares consistent with that applicable to Share Schemes funded by issuance of new shares.
Share Schemes of subsidiaries of listed issuers
Share award schemes of subsidiaries
  • Governs share option schemes of subsidiaries.
  • Extends Chapter 17 to also govern subsidiaries’ share award schemes funded by new or existing shares.

Analysis and Takeaways

In the Consultation Paper, the Exchange proposes to extend Chapter 17 of the Listing Rules to include share award schemes, in view of the issuers’ increasing adoption of share awards and options.  We note that there is an existing inconsistency of Listing Rule treatments as to share option schemes and share award schemes.  It is a therefore welcoming move for the Exchange to align the Listing Rules requirements in respect of the Share Schemes.  Since the regime of share option schemes has remained unchanged for over two decades, the proposals can help to address the market developments and be in conformity with the international standards, which will maintain investor confidence.

Please contact our Partner Mr. Rodney Teoh for any enquiries or further information.

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