May 10 1999 New Rules on Share Option Schemes Drew & Napier LLC | Employment & Immigration - Singapore Employment & Immigration Size Limit Participation Exercise Price Disclosure Requirements Timeframes Administration Unlisted Subsidiaries The rules issued by the Stock Exchange of Singapore on share option schemes (SOS) are set in Clause 947 and Practice Note 9h of the Listing Manual. Clause 947 states that all schemes implemented by listed issuers or their subsidiaries that involve the issue of shares or other securities (including options) to employees must comply with the guidelines set out in Practice Note 9h. On April 6 1999, the stock exchange made several substantial amendments to the rules contained therein which took immediate effect. Only the rules that have already been amended are discussed below. Size Limit The limit on the size of an SOS has been raised from 5% to 15% for Main Board listed issuers and removed for SESDAQ listed issuers.Participation Controlling shareholders and non-executive directors The rules provided that only employees and executive directors of the listed group, excluding substantial shareholders of the listed issuer, could participate in an SOS. The rules have been amended to allow (i) non-executive directors of the listed group and (ii) employees and directors of the listed group who are controlling shareholders and their associates to participate in the listed issuer's SOS.Participation by such persons is, however, subject to certain conditions. First, the shareholders must approve of the participation of each person as well as the grant of options to them. Second, for Main Board listed issuers, the aggregate number of shares available to controlling shareholders and their associates should not exceed 25% of the shares available under the SOS. Also, the number of shares available to each controlling shareholder or his associate should not exceed 10% of the shares available under the SOS.'Controlling shareholder' has been re-defined (using a substance test) as "a shareholder exercising control over a company where 'control' means the capacity to dominate decision-making, directly or indirectly, in relation to the financial and operating policies of a company". Unless rebutted, a person who controls directly or indirectly a shareholding of 15% or more of a company's issued share capital will be presumed to be a controlling shareholder of that company.Pursuant to the above amendment, consequential changes have also been made to Clause 101 on the definition of 'controlling interest' and paragraphs 1(2), 1(8) and 1(9) of Appendix 5 on articles of association.Listed issuers proposing to allow controlling shareholders and their associates to participate in their share option schemes would be expected to provide clear justifications for allowing such participation and for the specific grants to be made to such persons.Parent group employees The rules did not allow directors and employers of a listed issuer's parent group who did not hold positions in the listed group (ie, 'parent group employees') to participate in the listed issuer's SOS. The amended rules allow parent group employees who have contributed to the success and development of the listed group to participate in the listed issuer's SOS. Their participation is, however, subject to the following two conditions. First, for Main Board listed issuers, the aggregate number of shares available to parent group employees must not exceed 20% of the shares available under the SOS. Second, approval of independent shareholders must be obtained for the aggregate number of options to be granted to parent group employees under the scheme, as well as any significant grant to a parent group employee that will increase the aggregate number of options granted to that employee to 5% or more of the total options available to parent group employees (ie, 'significant recipient').When seeking shareholders' approvals, listed issuers are expected to provide clear justifications for allowing participation by, and grant of options to, the parent group employees so that shareholders can make informed decisions on the company's proposals.Directors and employees of associated companies Practice Note 9h provided that employees of an associated company could participate in a listed issuer's SOS provided that the following conditions were met: the listed issuer had control over the management of the associated company; the associated company contributed at least 40% of the listed issuer's average group pre-tax profits for the last three years; and the associated company did not have a scheme of its own.Under the amended rules, a listed issuer may allow employees of an associated company to participate in its SOS, provided only that the listed issuer has control over the management of the associated company. The reasons for allowing such employees to participate in the SOS should be disclosed in the circular to shareholders when seeking shareholders' approval for the scheme.Multiple schemes The rules providing that an employee shall not participate in more than one scheme implemented by the listed group, and that he should always participate in the scheme of the company in which he is principally employed, have been deleted. Under the amended rules, the decision on whether employees should be allowed to participate in more than one scheme is left to listed issuers.Exercise PriceThe rules provided that the exercise price of options would be pegged at the average market price prevailing during the price fixing period immediately before the options were granted. The amended rules allow the exercise price to be set at a discount to the market price, subject to a two-year vesting period and provided that shareholders have specifically approved the maximum discount. In the case of a Main Board listed issuer, a maximum limit of 20% is imposed on the discount. Clear justifications should be disclosed in the circular for shareholders to make an informed decision on whether to approve the maximum discount.Disclosure RequirementsTo promote transparency in the grant of options, listed issuers are now required to disclose the following information in their annual reports: details of options granted to and exercised by (i) directors of the listed issuer, (ii) controlling shareholders and their associates and (iii) employees who receive 5% or more of the total options available under the scheme; details of options granted to parent group employees; and names of the members of the committee administering the scheme.These additional disclosure requirements will apply from the financial year ending on or after June 30 1999.TimeframesThe rule providing that options could only be granted within a period of 42 days commencing from the fifth market day following the announcement of financial results, has been deleted.The rule requiring a two-year moratorium to be imposed on the exercise of options by employees who served less than one year of service in the listed group at the time of grant, has been relaxed. Under the amended rule, such options may be exercised any time after one year of the date of offer.AdministrationThe rules provided that the SOS had to be administered by a committee consisting of directors of the listed issuer who were not participating in the scheme. The amended rules allow directors who participate in the scheme and not more than one nominee of the listed issuer's parent company to join as committee members. However, a member who is a participant may not be involved in the deliberations of the committee in respect of the individual options to be granted to him.Unlisted SubsidiariesPractice Note 9h also sets out the requirements an unlisted subsidiary of a listed issuer has to comply with if it wishes to implement an SOS of its own. Under the amended rules, unlisted subsidiaries are subject to the same rules that apply to listed issuers. For further information on this topic please contact Petrus Huang at Drew & Napier by telephone (+65 535 2208) or by fax (+65 535 4864) or by email ([email protected]). The Drew & Napier web site can be accessed at www.drewnapier.com . The materials contained on this web site are for general information purposes only and are subject to the disclaimer.