The Stock Exchange of Hong Kong published the conclusions to its consultation on Proposed Amendments to Listing Rules relating to Share Schemes of Listed Issuers on 29 July 2022. After which, the amendments to Chapter 17 of the Listing Rules relating to share schemes will become effective from 1 January 2023. Listed issuers may also choose to adopt the amended Rules for their share schemes before the effective date.
Highlights of the Amendments
1. Chapter 17 of the Listing Rules currently govern share option schemes only. After the amendment, the chapter will be extended to include both share option schemes and share award schemes.
2. The enhanced share schemes regulation is aim to manage dilution of listed shares and provide information disclosure requirements to maintain high levels of shareholder protection.
3. The Remuneration Committee will be required to approve matters relating to share grants to the issuer’s directors and senior management. If any terms of share grants to directors and senior management deviate from the Chapter 17 requirements, the Remuneration Committee must explain why it was appropriate to approve those terms, the factors that it took into account and how the grants align with the purpose of the scheme.
Key changes to Chapter 17
The key changes to Chapter 17 are as follows :-
1. Eligible Participants
There is no restriction on who may be the eligible participants under the current rules. After the amendments, eligible participants include only employee participants, related entities participants and services providers.
2. Scheme Mandate
The rule regarding the 30% limit (ie options outstanding should not exceed 30% of the issued shares) will be removed.
The grant of share options by a listed issuer from all its share schemes should be limited to 10% of its total issued shares as at the date of approval of the scheme (or the refreshment of the limit) (“10% Limit”). Refreshment of the 10% Limit can only be done once every three years.
3. Minimum Vesting Period for Share Options
The vesting period for a share grant should be for a minimum period of 12 months. If a shorter vesting period is to be applied (applicable to employee participants only), listed issuers shall explain the reasons.
4. Performance Targets and Clawback Mechanism
The listed issuer should continue to set out the performance targets attached to share grants or if there are not any, a negative statement. Also, according to the amended rules, the method for assessing how the performance targets are satisfied and the clawback mechanism or a negative statement should be included in the scheme documents.
5. Exercise Price
The current restriction on the exercise price of share options remains unchanged. For share awards, no restriction on share grant price is imposed.
6. Limits on Share Grants to Individual Participants and Connected Parties
Under the amended rules, any grant of options and/or awards of any amount should be approved by independent non-executive directors (“INED”). Shareholders’ approval is required for grant of options and awards to an individual participant in any 12-month period up to and including the date of such grant (“12-Month Period”) exceeding 1% of the relevant class of shares in issue (“1% Individual Limit”), or grant of options and awards to INED or substantial shareholder in the 12-Month Period exceeding 0.1% of the relevant class of shares in issue (“0.1% Individual Limit”), or grant of awards to a connected party in the 12-Month Period exceeding 0.1% Individual Limit.
7. Announcement on Share Grants
Under the amended rules, additional information like vesting period, performance targets, clawback mechanism, financial assistance available to the grantee to facilitate the purchase of shares and number of shares available for future grant under the scheme shall be disclosed in the grant announcement.
Disclosure on individual basis shall be made if the grant is made to a director, chief executive, substantial shareholder, or any of their associates, or individual participant exceeding the 1% Individual Limit, or a related entity participant or service provider exceeding the 0.1% Individual Limit.
8. Disclosure in Annual Reports and Interim Reports
As an additional requirement, the listed issuer should disclose the number of options and awards available for grant under the scheme mandate and the service provider sublimit at the beginning and end of the financial year / period, the number of shares that may be granted under all schemes during the financial year / period divided by the weighted average number of shares of the relevant class in issue for the year / period and the fair value of the options in the annual report and / or interim report as appropriate.
9. Disclosure of the Work Performed Relating to Share Schemes by the Remuneration Committee
As a new requirement, remuneration committee needs to disclose a summary of material matters relating to share schemes that it had reviewed and / or approved during the financial year. For matters relating to any grants of options or awards to the listed issuer’s directors and senior managers, the remuneration committee must explain why it was appropriate to approve those matters.
10. Changes to the Terms of Share Award or Option Granted
Changes to terms of share award or option granted should be approved by the same approvers of the initial grant, ie the board, the remuneration committee, the independent non-executive directors and / or the shareholders of the listed issuer (as the case may be).
11. Transfer of Share Awards or Options
Under the amended rules, the Stock Exchange may consider granting a waiver to allow a transfer to a vehicle (such as a trust or a private company) for the benefit of the participant and any family members of such participant (e.g. for estate planning or tax planning purposes) that would continue to meet the purpose of the scheme and comply with other requirements of Chapter 17. Where such waiver is granted, the listed issuer is required to disclose the beneficiaries of the trust or the ultimate beneficial owners of the transferee vehicle.
12. Voting Rights of Unvested Scheme Shares
It is confirmed under the amended rules that the trustee holding unvested shares of a share scheme, whether directly or indirectly, shall abstain from voting on matters that require shareholders’ approval under the Listing Rules, unless otherwise required by law to vote in accordance with the beneficial owner’s direction and if such a direction is given.
13. Share Schemes Funded by Existing Shares of Listed Issuers
The listed issuer must now disclose in its annual report a summary of each share scheme funded by existing shares of the listed issuer and information about the grants of options and awards to each director of the listed issuer, the five highest paid individuals during the financial year in aggregate and other grantees in aggregate.
14. Share Scheme of Subsidiaries of Issuers
After the amendment, Chapter 17 would only apply to share schemes of a subsidiary whose revenue, profits or total assets accounted for 75% (or more) of that of the listed issuer under the percentage ratios in any of the latest three financial years (“Principal Subsidiary”), and not other subsidiaries.
Other than the Principal Subsidiary, the grant of options and awards by a subsidiary will be governed by Chapter 14 and 14A of the Listing Rules.
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