Share schemes including share options schemes and share award schemes ("Share Schemes") serve to reward and incentivize listed issuers’ employees and service providers to contribute to the issuer on a longer term basis, and to align their interests with those of the issuers and their shareholders. The current Chapter 17 of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited ("Listing Rules") provides a framework that governs share option schemes only. In order to provide issuers with flexibility to structure their remuneration policies whilst managing dilution of listed shares and providing informative disclosure, The Stock Exchange of Hong Kong Limited ("HKEx") published a consultation paper in October 2021 to its proposed amendments to the Listing Rules relating to Share Schemes of listed issuers to extend Chapter 17 of the Listing Rules to also govern share award schemes and enhance the regulations of share schemes.
During the consultation period, the HKEx received 58 non-duplicate responses to the consultation paper from a broad range of respondents and all of the proposals received support from a majority of the respondents.
On 29 July 2022, the HKEx published the conclusions to its consultation, “Consultation Conclusions on Proposed Amendments to Listing Rules relating to Share Schemes of Listed Issuers and Housekeeping Rule Amendment" (the “Consultation Conclusions”), setting out the changes to the Listing Rules that will become effective on 1 January 2023. The HKEx also published Frequently Asked Questions No. 083-2022 to 101-2022 to provide guidance on the amended Listing Rules and the transitional arrangements for existing Share Schemes.
The key changes to the Listing Rules regarding Share Schemes to be implemented are summarised as follows:
SUMMARY OF KEY CHANGES TO THE LISTING RULES
I. Share Schemes funded by issuance of new shares of listed issuers
The proposal 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 will be adopted. Issuers may award new shares utilizing a general or specific mandate under the Listing Rule 13.36 if the share grants fall outside the scope of Chapter 17 of the Listing Rules (e.g. the grantees do not fall within the definition of eligible participants under Chapter 17 of the Listing Rules).
b) Eligible participants
It will be adopted that eligible participants of Share Schemes shall include:
- directors and employees of the issuer or any of its subsidiaries (including persons who are granted shares or options under the scheme as an inducement to enter into employment contracts with these companies) ("Employee Participants");
- directors and employees of the holding companies, fellow subsidiaries or associated companies of the issuer ("Related Entity Participants"); and
- persons who provide services to the issuer group on a continuing or recurring basis in its ordinary and usual course of business which are in the interests of the long term growth of the issuer group ("Service Providers").
c) Minimum vesting period for Share Grants
A minimum vesting period of 12 months will be required for all grants of share awards and/or options over new shares of the issuer (in respect of an issuer’s Share Schemes) or grants of share awards and/or options over new or existing shares of the subsidiary (in respect of a subsidiary’s Share Scheme) ("Share Grants"). Share Grants to Employee Participants may be subject to a shorter vesting period under specific circumstances as set out in the scheme document.
Further, Share Grants with a shorter vesting period must be supported by the views of the board of directors (and the remuneration committee for Share Grants to directors and senior management) as to why a shorter vesting period is appropriate and how the grants align with the purpose of the scheme.
d) Scheme mandate
The limit on Share Grants under all Share Schemes of an issuer of not exceeding 10% of an issuer’s issued shares as at the date of shareholder's approval of the scheme ("Scheme Mandate Limit") will be applied, which may be refreshed by shareholders’ approval once every three years. Independent shareholders’ approval for refreshment of scheme mandate will also be required within a three-year period.
Further, the issuer will be required to set a sublimit for Share Grants to Service Providers within the Scheme Mandate Limit which must be separately approved by shareholders and disclose the basis for determining the sublimit in its circular to its shareholders.
e) Performance targets and clawback mechanism
Performance targets and clawback mechanism for Share Grants must be disclosed in the scheme document and in grant announcements and if none, a negative statement. Disclosure of the views of the remuneration committee regarding the non-necessity of performance targets and a clawback mechanism in the grant announcements is required where Share Grants to directors and senior management are made without performance targets and/ or clawback mechanisms.
f) Limit on large Share Grants to individual participants and limits on Share Grants to Connected Persons
Shareholders' approval will be required for Share Grants to:
i. an individual participant if the Share Grants in aggregate exceed 1% of issued shares of the issuer over any 12- month period ("1% Individual Limit"); or
ii. a director, chief executive or substantial shareholder of the issuer or an associate of any of them ("Connected Person") in excess of the de minimis threshold.
The de minimis threshold refers to (i) the limit on grants of share awards (involving new shares) to a director (other than an independent non-executive director ("INED")) or chief executive of the issuer or any of their associates; or (ii) the limit on Share Grants to an INED or a substantial shareholder of the issuer or any of their associates, which, without shareholders’ approval, must not exceed 0.1% of the issued shares of the issuer over any 12-month period.
g. Disclosure of Share Grants in announcements and interim and annual reports
Issuers will be required to disclose, among others, details of Share Grants to the following participants to be made on an individual basis:
i. a Connected Person;
ii. a participant with Share Grants in excess of the 1% Individual Limit; and
iii. 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.
Issuers will also be required to disclose a summary of the terms of each share scheme in their annual reports.
II. Share Schemes funded by existing shares of listed issuers
Disclosure in annual reports
Issuers will be required to disclose a summary of each share scheme and the grants of existing shares consistent with that applicable to Share Schemes funded by issuance of new shares of issuers relating to the grants of options and awards to (i) each director of the issuer; (ii) the five highest paid individuals during the financial year in aggregate; and (iii) other grantees on an aggregate basis in their annual reports.
III. Share Schemes of subsidiaries of listed issuers
Subsidiaries’ share award schemes
Chapter 17 will be extended to govern Share Schemes that are funded by new or existing shares of a principal subsidiary, which is a subsidiary 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.
Share Grants under Share Schemes of other insignificant subsidiaries will be subject to Chapters 14 and/or 14A requirements. In brief,
i) any disposal (involving grants of existing shares of the subsidiary held by the issuer) and deemed disposals (involving grants of new shares or options over new shares by the subsidiary) would be subject to disclosure (if any percentage ratio based on the size of the scheme mandate is over 5%) and shareholders’ approval (if any percentage ratio is over 25%) under Chapter 14. Issuers will be required to disclose the major terms of the scheme in the announcements and/or shareholders’ circulars; and
ii) Share Grants to a connected person would be subject to disclosure and/or independent shareholders’ approval if the grants to such person in a 12-month period exceed the de minimis thresholds under Chapter 14A.
IMPLEMENTATION AND TRANSITIONAL ARRANGEMENTS
- The amended Listing Rules will become effective on 1 January 2023. Issuers may adopt the amended Listing Rules for their Share Schemes before the effective date.
- Regarding the transitional arrangements for the existing Share Schemes, the new disclosure requirements would take effect on 1 January 2023. Issuers may make Share Grants only to eligible participants defined under the amended Listing Rules under their existing mandates or an advanced specific mandates for financial years commencing on or after 1 January 2023.
- 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.
- The amendments in the Listing Rules regarding Share Schemes are significant. Issuers and listing applicants should pay careful attention and seek appropriate guidance in structuring their Share Schemes and other incentives for employees.
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Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice. Please contact [email protected] if you have any questions about the article.