3 August 2022
HKSE NEW SHARE SCHEME RULES WHAT YOU SHOULD KNOW
On 29 July 2022, the Hong Kong Stock Exchange (HKSE) published its consultation conclusions on the proposed amendments to the Listing Rules relating to Share Schemes of listed issuers.
The Rule amendments have potentially wide ramifications to listed issuers' existing as well as new Share Schemes. The new Rules will govern share schemes (Share Schemes) involving grants of options and share awards over new shares (Share Grants). The changes aim to provide a consistent regulatory framework for Share Schemes and are intended to also achieve HKSE's policy intent to manage shareholding dilution of listed issuers and their subsidiaries which adopt share schemes, provide flexibility to incentivise employees and service providers, provide informative disclosure to shareholders and investors and uphold robust shareholder protection.
The new Rules will become effective on 1 January 2023 with transitional arrangements (which are summarised below). HKSE has recommended that listed issuers (who are adopting new Share Schemes or refreshing the scheme mandate under existing Share Schemes) and IPO applicants comply with the new Rules before they become effective on 1 January 2023.
The new Rules will also apply to the Share Schemes of 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 (a Principal Subsidiary), and not other subsidiaries. In relation to other subsidiaries, HKSE will apply Chapter 14 to address dilution of subsidiary's interest resulting from Share Grants under subsidiary share schemes (and Chapter 14A to Share Grants to connected persons).
Considerations for Listed Issuer, Principal Subsidiary, Other Subsidiary of a Listed Issuer or IPO applicant
Here are some questions listed issuers and IPO applicants may wish to consider and we also set out below a summary of the existing and new changes to assist your consideration.
If you are a listed issuer, a Principal Subsidiary or other subsidiary of a listed issuer, what type of Share Scheme do you have (share option scheme, share award scheme or a mixed awards scheme)? Does your Share Scheme currently issue awards over new shares, existing shares or both? Depending on the type of scheme you have, this will dictate the changes (if any) you need to make in order to comply with the new Rules and the transitional arrangements that are available to you.
If your existing Share Scheme(s) needs to be amended, consider the pros and cons of amending your Share Scheme(s) or terminating and adopting a new Chapter 17 compliant Share Scheme? Which approach would best suit your commercial and other needs? This may depend on a number of factors, including the type of Share Scheme you currently have, the term remaining in the life of the Share Scheme and relevant trust arrangements, etc. One further point to consider is whether your trustee and administration arrangements (if any) would also need to be updated to reflect changes to your Share Scheme(s).
If you are a listed issuer, you should update members of your renumeration committee (RemCo) of the additional work by the RemCo and the disclosures that will need to be made as a result of the new Rules.
If you are an IPO applicant, what type of Share Scheme do you wish to put in place after listing? Will you want to use new or existing shares? How do the new Rules affect the structure of your proposed Share Scheme? Does your remuneration policy / structure also need to be updated to reflect the new Rules on, for example, limits on share awards granted to directors? What do the new Rules mean if you are looking to use a trust structure prior to a listing to fund future awards?
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Brief Summary of the Existing Rules and the New Rules
Chapter 17 governs all share schemes involving grants of options Chapter 17 will govern all share schemes involving grants of share awards and grants of options over
over new shares only of listed issuers and their subsidiaries.
new shares of listed issuers and their Principal Subsidiaries.
2. Eligible participants
Eligible participants (Eligible Participants) now defined to include the following: Employee Participants directors and employees of the issuer and its subsidiaries (including
persons who are granted options or awards to induce them to enter into their employment contracts) Related Entity Participants directors and employees of issuer's related entities (i.e. holding
companies, fellow subsidiaries or associated companies) Service Providers persons who provide services to the issuer group on a continuing and
recurring basis in its ordinary and usual course of business which are in the interests of the longterm growth of the issuer group, but should exclude placing agents, financial advisers and professional service providers such as auditors or valuers.
3. Scheme mandate
Maximum 10% scheme mandate limit for share options over new shares, which can be refreshed at any time with shareholders' approval.
The number of outstanding options is limited to 30% of the issued shares of the issuer from time to time.
Maximum 10% scheme mandate limit which applies to all grants of share awards and share options over new shares (Share Grants). Such 10% limit may be refreshed (a) every three years with shareholders' approval or (b) within a three year period with shareholders' approval but with the controlling shareholder (or where there is no controlling shareholder, the executive directors, non-executive directors and chief executive) and its associates abstaining from voting.
Cap on the number of outstanding options has been removed.
4. Service provider N/A sublimit
If participants include Service Providers, a sublimit (Service Provider Sublimit) must be set within the scheme mandate limit and separately approved by shareholders. The requirements relating to refreshment of the scheme mandate limit in paragraph 3 above applies to the Service Provider Sublimit.
5. Vesting period N/A
The vesting period for Share Grants should not be less than 12 months.
Share Grants to Employee Participants may be subject to a shorter vesting period provided that (a) the scheme document sets out the specific circumstances where the vesting period may be shortened; and (b) if the specific circumstances relate to grants to directors and senior managers, the Board or the RemCo explains in the circular for the adoption of the scheme why the arrangements are appropriate and how the Share Grants align with the purpose of the Share Scheme.
6. Exercise price of options
The exercise price of options must be at least the higher of (a) the closing price of the securities and (b) the average closing price of the securities for the five business days immediately preceding the grant date.
Retain the current restriction on the exercise price of options. No restriction on share grant price for share awards under the Share Scheme.
7. Performance targets
The scheme document must include a description of the performance targets (which may be qualitative) attached to Share Grants (if any) and if none, a negative statement.
Issuer is required to disclose in the grant announcement the performance conditions (which may be qualitative) attached to the Share Grants (if any).
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Where Share Grants to directors and/or senior managers do not have any performance targets, the RemCo is required to give its view on why it is not necessary and how the Share Grants align with the purpose of the Share Scheme in the grant announcement.
8. Clawback mechanism
If the issuer has established a clawback mechanism to recover or withhold remuneration to participants in the event of serious misconduct, a material misstatement in the issuer's financial statements or other circumstances, the scheme document must include a description of the clawback mechanism or if none, a negative statement.
Where Share Grants to directors and/or senior managers do not have a clawback mechanism, the RemCo is required to give its view on why it is not necessary and how the Share Grants align with the purpose of the Share Scheme in the grant announcement.
9. Transferability of Share Grants
Options granted must be personal to the grantee and cannot be transferred.
Share Grants must be personal to the grantee but the HKSE may consider granting waiver to allow a transfer of the Share Grant to a vehicle (such as a trust or private company) for the benefit of the grantee and his family members. As a condition to the waiver, the issuer and the grantee must demonstrate that there are appropriate measures in place to ensure that after the transfer, the Share Grants would continue to meet the purpose of the Share Scheme and comply with the Listing Rules.
10. Voting rights of N/A unvested scheme shares
A trustee holding unvested shares of a Share Scheme (whether directly or indirectly) must 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 such a direction is given.
11. Share Grants to individual grantees
Share option schemes
Share award schemes
All Share Schemes
Shareholders' approval is required for grants of options in excess of 1% of issued shares of the issuer over a 12month period.
No specific limit (share awards involving new shares are granted under general mandate or a specific mandate).
Shareholders' approval is required for Share Grants in excess of 1% of the issued shares of the issuer over any 12-month period (the 1% Individual Limit).
12. Share Grants to directors (other than INEDs) or chief executive of the issuer
INEDs' approval is required for any grants of options to directors (other than INEDs) and to the chief executive.
Shareholders' approval is required if the grants of share options exceed 1% of the issued shares of the issuer over any 12-month period.
Shareholders' approval is required for any grant of share awards involving new shares (since these constitute share issuances to a connected person).
INEDs' approval is required for any Share Grants to directors (other than INEDs) and to the chief executive.
Independent shareholders' approval is required for any grants of share awards (i.e. excluding grant of options) in excess of 0.1% of the issued shares of the issuer over any 12-month period. All core connected persons, the grantee and his associates must abstain from voting.
Shareholders' approval is required if the Share Grants (i.e. including share awards and share options) in aggregate exceed the 1% Individual Limit.
13. Share Grants to INEDs or substantial
Approval by INEDs will be Shareholders' approval is INEDs' approval is required for any Share Grants to INEDs (excluding any INED who is the proposed required (excluding any INED required for any grant of share grantee). who is the proposed grantee). awards involving new shares
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shareholders of the issuer
Independent shareholders' approval is also required for grants of options in excess of (i) 0.1% of the issued shares of the issuer; and (ii) HK$5 million over a 12-month period.
(since these constitute share issuance to a connected person).
Independent shareholders' approval is required for any Share Grants (i.e. including share awards and share options) in excess of 0.1% of the issued shares of the issuer over any 12-month period.
The HK$5 million de minimis threshold for grants of share options to an INED or substantial shareholder of the issuer will no longer apply.
Announcement on grant of options on an individual basis if the grantee is a director, chief executive or substantial shareholder of the listed issuer or any of their associates.
The issuer must also disclose the terms of grants in the announcement.
Issuer will be required to disclose, in the announcement, Share Grants to the following participants on an individual basis: a director, chief executive or substantial shareholder of the listed issuer, or an associate of any of
them; a participant with Share Grants exceeding the 1% Individual Limit; and a Related Entity Participant or Service Provider with Share Grants exceeding 0.1% of the relevant
class of shares in issue over any 12-month period.
Share Grants made to other participants may be disclosed in aggregate by category. Where Share Grants are made to Service Providers or Related Entity Participants, the announcement must include the views of the Board as to why the grants are made and how they align with the purpose of the Share Scheme.
The issuer must also disclose the number of shares available for future grants under the scheme mandate limit and the Service Provider Sublimit (if applicable).
Please also see paragraphs 7 and 8 above on disclosure of performance targets and clawback mechanism.
15. Disclosure in annual report and interim report
Issuer must disclose the following details in its annual report and interim report: each of the directors, chief executive or substantial
shareholders of the listed issuer, or their respective associates who have received options; each participant with options granted in excess of the individual limit; aggregate figures for employees working under employment contracts that are regarded as "continuous contracts" for the purposes of the Employment Ordinance who have received options; aggregate figures for suppliers of goods or services who have received options; all individuals, as an aggregate whole, who have received options; and particulars and movements of options granted during the reporting period
Issuer must disclose the following details in its annual report and interim report in relation to Share Grants granted and to be granted to: each of the directors, chief executive or substantial shareholders of the listed issuer, or their
respective associates; each participant with Share Grants granted and to be granted in excess of 1% Individual Limit; each Related Entity Participant or Service Provider in any 12-month period exceeding 0.1% of the
relevant class of shares in issue; and other Employee Participants, Related Entity Participants and Service Providers by category.
Issuer will also need to disclose: particulars and movements of the Share Grants granted during the reporting period and the fair value
of Share Grants at the date of grant and the accounting standard and policy adopted; the number of Share Grants available for grant under the scheme mandate and the Service Provider
Sublimit (if applicable) during the reporting period; the number of shares that may be issued in respect of Share Grants under all Share Schemes of the
issuer during the reporting period divided by the weighted average number of shares of the relevant class in issue for the reporting period; and a summary of the terms of each scheme (for the annual report only).
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16. Alterations to terms and conditions of a share scheme
17. Trust arrangements
Any alterations to the share scheme of a material nature must be approved by the shareholders of the listed issuer, except where the alterations take effect automatically under the existing terms of the scheme.
Any alterations to a Share Scheme of a material nature must be approved by the shareholders of the issuer. Any change to the terms of Share Grants to a participant must be approved by the Board, the RemCo, the INEDs and/or the shareholders of the listed issuer if the initial grant of the Shares Grants was approved the Board, the RemCo, the INEDs and/or the shareholders of the listed issuer, except where the alterations take effect automatically under the existing terms of the scheme.
N/A Chapter 17 applies to Share Schemes involving Share Grants through trust or similar arrangements for the benefit of participants specifically identified by the issuer before the grants.
Application of the New Rules to Principal Subsidiaries
As noted above, the new Rules will apply to Share Schemes of Principal Subsidiaries. The following modifications to the above summary will apply to Principal Subsidiaries:
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 the Principal Subsidiary.
The requirements relating to the exercise price of share options do not apply if the subsidiary's shares are not listed on the HKSE. However, the Share Scheme of a Principal Subsidiary must provide that the exercise price of options granted after the issuer has resolved to seek a separate listing of the Principal Subsidiary on the HKSE, GEM or an overseas stock exchange and up to the listing date of the Principal Subsidiary must not be lower than the new issue price (if any). In particular, any options granted during the period commencing six months before the lodgment of Form A1 (or its equivalent) up to the listing date of the Principal Subsidiary are subject to this requirement. The Share Scheme must therefore provide for any necessary adjustment of the exercise price of options granted during such period to not lower than the new issue price.
Share Schemes Involving Existing Shares of Listed Issuers
There is no requirement for a listed issuer to publish an announcement of share grants involving existing shares. However, the issuer will need to disclose in its annual report (a) details of 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 in aggregate and (b) a summary of each share scheme.
The new Rules come into effect on 1 January 2023. The following transitional arrangements which apply to issuers, their Principal Subsidiaries and other subsidiaries. HKSE has recommended that listed issuers (who are adopting new Share Schemes or refreshing the scheme mandate under existing Share Schemes) and IPO applicants comply with the new Rules before they become effective on 1 January 2023.
Share option scheme Share award scheme
Share option scheme
Share award scheme
Share option scheme / Share award scheme
Disclosure in Announcement Interim Report Annual Report
From 1 January 2023
Share option scheme that has complied with existing Chapter 17:
The subsidiary may continue to grant share options under its scheme mandate
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Share option scheme Share award scheme
Share option scheme
Share award scheme
Share option scheme / Share award scheme
Other existing or new Share Schemes:
Share Grants to Eligible Participants
New definition of Eligible Participants applies for financial years commencing on or after 1 January 2023.
Issuer may continue to make Share Grants using existing scheme mandate.
Issuer may grant shares under general mandate until the second AGM after 1 January 2023.
Same as listed issuer.
Issuer must comply with Chapter 14 (based on the size of the scheme mandate for future grants) and/or Chapter 14A before making Share Grants.
Grants of share awards or options must comply with Chapter 14 (based on the size of the scheme mandate for future grants) and/or Chapter 14A.
Amendment of terms of On or before the refreshment of the scheme mandate limit / expiry of scheme mandate above or adoption of a scheme to comply with new Share Scheme. amended Chapter 17
We will be very happy to discuss any of the above if you have any questions. Please feel free to contact Teresa Ko, Grace Huang, Stephanie Chiu or Connie Cheung at Freshfields if you have any questions.
Teresa Ko Partner, China Chairman
T +852 2846 3425 E [email protected]
Grace Huang Partner
T +852 2913 2656 E [email protected]
Stephanie Chiu Counsel
T +852 2846 3491 E [email protected]
Connie Cheung Head of Listed Companies Advisory
T +852 2846 3329 E [email protected]