The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) published the consultation to the Proposed Amendments to Listing Rules Relating to Share Schemes of Listed Issuers[i] in July 2022. The new rules will take effect from 1 January 2023 (the “Effective Date”).
One of the major amendments is to extend the existing rules governing share option schemes involving grants of options to acquire new shares of issuers or its subsidiaries to all kinds of share schemes. This includes share award schemes granting share awards of the issuers or its subsidiaries.
What are the key changes?
I. Share Schemes involving issuance of new shares of listed issuers
- Extend Chapter 17 to govern all share schemes involving grants of share awards and grants of options to acquire new shares of issuers
Chapter 17 of the Main Board Listing Rules [ii] (the “Chapter 17”) currently provides a framework that governs share option schemes. The amended Chapter 17 shall apply to all share option schemes and share award schemes (“Share Schemes”) funded by an issue of new shares by listed issuers. Issuers may award new shares utilizing a general or specific mandate under Rule 13.36 of the Main Board Listing Rules if the share grants fall outside the scope of Chapter 17 (e.g. the grantees do not fall within the definition of eligible participants under Chapter 17).
- Define eligible participants of Share Schemes
Share grants could be made to Eligible Participants, which is defined to include only Employee Participants[iii], Related Entity Participants[iv] and Service Providers[v].
Where eligible participants of a scheme include Service Providers and Related Entity Participants, independent non-executive directors may be required to opine whether the inclusion of these participants aligns with the purpose of the scheme and the long term interests of the issuer and its shareholders.
- Scheme mandate
- Apply a Scheme Mandate Limit[vi] of not exceeding 10% of an issuer’s issued shares as at the approval date to all Share Schemes of the issuer and require the issuer to set a Service Provider Sublimit[vii] within the Scheme Mandate Limit and disclose the basis for determining the sublimit.
- Require independent shareholders’ approval for refreshment of scheme mandate within a three-year period.
- Share Grants to individual participant exceeding 1% and connected person require shareholders’ approval
Require shareholders’ approval for Share Grants[viii] to (i) an individual participant exceeding the 1% individual limit; or (ii) a Connected Person[ix] in excess of the de minimis threshold. All Share Grants to Connected Persons will also require approval by independent non-executive directors.
- General requirement of minimum vesting period of 12 months
A general requirement of a minimum vesting period of 12 months. Participants may however be subject to a shorter vesting period under specific circumstances as set out in the scheme document. Share Grants to directors and senior management with a shorter vesting period must be approved by the remuneration committee.
- Specific disclosure of share grants to certain participants on individual named basis
The amended Listing Rules require details of Share Grants by the issuer to the following participants to be disclosed on an individual named basis:
(i) a Connected Person;
(ii) a participant with Share Grants exceeding the 1% individual limit;
(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.
- Other Listing Rule disclosure requirements
The amended Listing Rules require respective disclosures of various details of the Share Schemes in the interim report and annual report including details of all share grants by issuer to participants and of the options granted during the reporting period.
Listed Issuers should also disclose in the remuneration report or corporate governance report a summary of material matters relating to Share Schemes that were reviewed and/or approved by the remuneration committee during the relevant year.
II. Share Schemes funded by existing shares of listed issuers
Currently, some share award schemes are funded by existing shares that are purchased on-market. These share award schemes do not require shareholders’ approval under the Listing Rules as they do not involve the issuance of new shares of the issuer. Disclosure about the operation of these schemes was previously governed by accounting standards.
The amended Listing Rules now require disclosure of these schemes and share grants to be consistent with requirements applicable to Shares Schemes funded by new shares as described in I above.
III. Share Schemes of subsidiaries of listed issuers
The amended Chapter 17 will also be applicable to the Principal Subsidiary (as defined below) of a listed issuer. Share Grants under Share Schemes of other subsidiaries will be subject to Chapters 14 and/or 14A requirements.
A “Principal Subsidiary” refers to 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.
In relation to Principal Subsidiary Share Schemes, the scheme mandate limit, the service provider sublimit, the 1% individual limit, the limits on grants to the issuer’s directors, chief executive and substantial shareholders (and their respective associates) and the limit on grants to service providers and related entity participants are to be calculated with reference to the total issued shares of that subsidiary.
If the effect of the subsidiary share schemes is a disposal (or deemed disposal) of the subsidiary’s interest, it would be governed by the notifiable transaction rules in Chapter 14.
Are there transitional arrangements?
The table below summarises the transitional arrangements:
- See Main Board Listing Rules 17.06A, 17.06B and 17.06C (GEM Rules 23.06A, 23.06B and 23.06C)
- See Main Board Listing Rules 17.07 and 17.09 (GEM Rules 23.07 and 23.09)
- See footnote 2 above
- See Main Board Listing Rule 17.03A (GEM Rule 23.03A)
- See Main Board Listing Rules 17.03B and 17.03C (GEM Rules 23.03B and 23.03C)
How does it affect you?
- Effective from 1 January 2023, listed issuers shall comply with the new disclosure requirements, including announcements, interim and annual report, for new and existing Share Schemes.
- Listed issuers may make Share Grants only to Eligible Participants defined under the amended Listing Rules for financial years commencing on or after 1 January 2023. You may therefore want to consider whether the current definition of “Eligible Participants” under your existing Share Scheme(s) comply with the relevant definitions. If not, you may consider to either amend the rules of the scheme or award new shares using a general or specific mandate under Listing Rule 13.36.
- Listed issuers who wish to grant shares pursuant to the terms of its existing Share Schemes under the existing scheme mandate limit should complete the grant before the Effective Date.
- Listed issuers adopting new schemes or refreshing the scheme mandate under existing schemes in 2022 should adopt the amended Rules.
- Effective from 1 January 2023, a Scheme Mandate Limit of 10% (of the relevant class of shares in issue as at approval date) covers all options and awards to be granted. You may therefore need to consider whether, taking into account all of your existing Share Schemes, the Scheme Mandate is sufficient and take advantage of the transitional arrangements accordingly.
- For new listing applicants, you should adopt the amended Listing Rules. You would need to consider how the amended Chapter 17 would affect any Share Schemes adopted prior the listing and/or to be adopted after listing and make relevant disclosures in the listing document.
Contact us
Our team is working with multiple listed issuers and new IPO applicants on compliance with the new Share Scheme requirements.
Please contact us if you have any questions.
Any reference to “Hong Kong” or “Hong Kong SAR” shall be construed as a reference to “Hong Kong Special Administrative Region of the People’s Republic of China”.
References
[i] Consultation Conclusions on Proposed Amendments to Listing Rules relating to Share Schemes of Listed Issuers and Housekeeping Rule Amendment https://www.hkex.com.hk/-/media/HKEX-Market/News/Market-Consultations/2016-Present/October-2021-Share-Schemes/Conclusions-(July-2022)/cp202110cc.pdf .
The Stock Exchange has also published an FAQ 083-2022- 101-2022 to provide guidance on understanding the relevant amended listing rules.
[ii] Chapter 23 of GEM Listing Rules. Unless otherwise specified, Listing Rules cited in this article refer to the Rules governing the Listing of Securities on the Stock Exchange of Hong Kong Limited on the Main Board. The amendments regarding the governing of Share Schemes apply equally to the GEM Listing Rules.
[iii] “Employee Participants” refer to 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).
[iv] “Related Entity Participants” refer to directors and employees of the holding companies, fellow subsidiaries or associated companies of the issuer.
[v] “Service Providers” refer to the persons who provide services to the issuer group on a continuing and recurring basis in their ordinary and usual course of business which are in the interests of the long term growth of the issuer group.
[vi] Scheme Mandate Limit is defined as the total number of shares securities which may be issued in respect of upon exercise of all options and awards to be granted under the scheme and any other Schemes.
[vii] Service Provider Limit is defined as the sublimit on the total number of shares that may be issued in respect of all options and awards to be granted to service providers within the scheme mandate limit where the participants of the scheme include service providers.
[viii] In respect of an issuer’s Share Schemes, Share Grants refer to grants of share awards and/or options over new shares of the issuer. In respect of a subsidiary’s Share Scheme, Share Grants refer to grants of share awards and/or options over new or existing shares of the subsidiary.
[ix] Connected Person is defined as a director, chief executive or substantial shareholder of the issuer or an associate of any of them.
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