New amendments to the Listing Rules relating to share schemes of listed issuers to be effective on 1 January 2023
Introduction
In our previous newsletter “The Stock Exchange proposes amendments to the Listing Rules in relation to share schemes of listed issuers and their subsidiaries”, we discussed the consultation paper issued by The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) in October 2021 regarding the proposed amendments to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) in relation to the share option schemes and share award schemes (collectively, the “Share Schemes”) of listed issuers and their subsidiaries, which are adopted for the purpose of rewarding and incentivising employees and service providers and to align their interests with the listed issuers and shareholders.
After the two-month public consultation, the Stock Exchange on 29 July 2022 issued its consultation conclusions (the “Consultation Conclusions”) setting out the amendments to the Listing Rules over Share Schemes (the “Amendments”), which will come into effect on 1 January 2023.
Amendments to Chapter 17 of the Listing Rules
Under the current framework, Chapter 17 of the Listing Rules only governs share option schemes. One of the proposed key changes to the Listing Rules is to extend Chapter 17 of the Listing Rules to cover share award schemes as well. The key Amendments are summarised as follows:
| Current Listing Rules | The Amendments |
Eligible participants | Generally no specific restriction as to who can be eligible participants under the Listing Rules. | Eligible participants are restricted to: · directors and employees of the issuer’s group (“Employee Participants”); · employees of the holding companies, fellow subsidiaries or associated companies of the issuer (“Related Entity”); and · service providers to the issuer’s group on a continuing and recurring basis in its ordinary course of business, which are in the interests of the long term growth of the issuer (“Service Providers”), but excluding (i) placing agents, (ii) financial advisers, or (iii) professional advisors or experts who provide assurance or are required to perform their services with impartiality and objectivity |
Scheme mandate | Grants of share options from each share option scheme cannot exceed 10% of an issuer’s issued shares (the “10% Scheme Mandate Limit”). | The 10% Scheme Mandate Limit will extend to cover all Share Schemes (including share option schemes and share award schemes) that involve the issuance of new shares. |
Shareholders may refresh the scheme mandate at any time. | · The 10% Scheme Mandate Limit may only be refreshed by shareholders once every three years. Additional refreshments within the three-year period must be approved by independent shareholders. | |
The total number of outstanding options cannot exceed 30% of the issued shares. | · In view of the adoption of 10% Scheme Mandate Limit on all Share Schemes, the 30% limit on outstanding share options is removed. | |
| No restriction. | · The issuer must set a sub-limit for the grants to Service Providers and disclose the basis for determining the sub-limit in its circular to shareholders, who will separately vote on the sub-limit. |
Minimum vesting period | No restriction. | · Generally 12 months, except grants to Employee Participants under specific circumstances, which should have been set out in the scheme document. · In the circular for adoption of the scheme, the issuer should disclose such specific circumstances supported by explanations by the board of directors (and the remuneration committee in case of grants to directors and senior management) as to why the arrangements are appropriate and how the grants align with the purpose of the scheme. |
Individual’s cap of each grant | Grants of options in excess of 1% of issued shares over a 12-month period require shareholders’ approval (the “1% Individual Limit”). | The 1% Individual Limit will be extended to apply to both grants of share options and share awards |
Limit on Share Grants to directors, chief executives or substantial shareholders of the issuer or an associate of any of them (“Connected Persons”) under share award schemes | Shareholders’ approval is required for any grant of share awards involving new shares under Chapter 14A of the Listing Rules. For share grants involving existing shares, no restriction. | · Grants under share award schemes which are previously not governed by Chapter 17 of the Listing Rules will also be subject to the same requirement under Chapter 17 of the Listing Rules. · Obtaining (a) INEDs’ approval and (b) independent shareholders’ approval, except such grant is not in excess of 0.1% of issued shares over a 12-month period, in the following cases: (i) Grants of share award (involving new shares) to a director or chief executive; or (ii) Share Grants (involving grants of new shares and/or option) to an INED or substantial shareholder.
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Revision of the de minimis threshold of grants of options to an INED or substantial shareholder | Grants of options to INEDs and substantial shareholders require (i) approval by INEDs (except INED who is the grantee) and (ii) independent shareholders’ approval, except grants of no more than 0.1% of issued shares and in the value of HK$5 million over a 12-month period. | Remove the HK$5 million de minimis threshold for grants of share options to an INED or substantial shareholder |
Performance targets and clawback mechanism | Disclosure of performance targets (or a negative statement) and no restrictions for clawback mechanism in grant announcement.
| · In addition to the existing disclosure requirement in the grant announcement, the scheme document must include a description of performance targets (which may be qualitative) and clawback mechanism for the Share Grants, or a negative statement if none. · Disclosure in the grant announcement of remuneration committee’s views on the Share Grants to directors and senior management if no performance targets and/or clawback mechanism is set. |
Announcement of Share Grants (also applicable to Share Schemes funded by existing shares) | Disclose details of option grants by announcement under Chapter 17 of the Listing Rules.
| · Disclosure by way of an announcement is required for details of Share Grants (including grants under share award schemes) to the following persons on an individual basis: o a Connected Person; o a participant with Share Grants in excess of the 1% Individual Limit; or o a Related Entity participant or Service Provider with Share Grants in excess of 0.1% of the issuer’s issued shares over any 12-month period. |
Disclosure of remuneration committee’s work in annual report | No specific requirement as to Share Schemes | Disclosure of a summary of the material matters relating to Share Schemes (reviewed by the remuneration committee during the year) in the issuer’s remuneration report or the corporate governance report of the annual report. |
Transfer of share awards or options | A grantee cannot transfer share options. | Allow a transfer of share awards or options to a vehicle (including a trust or a private company) for the benefit of the grantee and his/her family members (e.g. for estate planning or tax planning purposes), provided that such transfer would continue to meet the purpose of the scheme and other requirements of Chapter 17. |
Voting rights of unvested scheme shares | No restriction | The trustee holding unvested shares shall abstain from voting, except in certain circumstances |
Share Schemes of subsidiaries of issuer | The requirements under Chapter 17 of the Listing Rules are applicable to share option schemes adopted by subsidiaries of listed issuers which involve issue of new securities | The application of Chapter 17 of the Listing Rules will be extended to cover both share option schemes and share award schemes funded either by new shares or existing shares adopted by principal subsidiaries of listed issuers whose revenue, profits or total assets accounted for 75% (or more) of that of the issuer under the percentage ratios in any of the latest three financial years. |
Transitional arrangements
The amended Chapter 17 of the Listing Rules will take effect from 1 January 2023 (the “Effective Date”). For all existing share schemes, listed issuers would be required to comply with the new disclosure requirements from the Effective Date. Listed issuers may grant share awards or options only to eligible participants as defined in the amended Chapter 17 from the Effective Date. For refreshment of the scheme mandate undertaken after the Effective Date, listed issuers are required to follow the amended Chapter 17 of the Listing Rules and amend the terms of the existing schemes. Listed issuers should also note that no further refreshment of advanced mandate is allowed for share award schemes after the Effective Date. Listed issuers should also follow the new disclosure requirements for grant announcements, interim and annual reports from the Effective Date.
Conclusion
The amendments to Chapter 17 of the Listing Rules bring about a major overhaul of the regulatory regime over Share Schemes. If in doubt, listed issuers should consult professional advice as to the new regulatory regime before making any new Share Grants to participants upon the amendments becoming effective to ensure compliance of the amended Chapter 17 of the Listing Rules.
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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors. |
Published by ONC Lawyers © 2022 |
