New HKEX Listing Rules on Listed Issuers’ Share Schemes to Take effect 1 January 2023

On 29 July 2022, The Stock Exchange of Hong Kong Limited (the HKEx) published consultation conclusions on Proposed Amendments to the Listing Rules relating to Share Schemes of Listed issuers and Housekeeping Rule Amendment (the Consultation Conclusions).

The HKEx had previously issued the Consultation Paper on Proposed Amendments to Listing Rules relating to Share Schemes of Listed Issuers 1 in October 2021 on proposals to extend Chapter 17 of the Listing Rules to govern share award schemes, as Chapter 17 currently provides a framework that only governs share option schemes. There were also proposed changes to certain specific requirements in Chapter 17 and to improve disclosure of grants of share options and share awards. The major changes mainly relate to (i) the role of the remuneration committee and INEDs; (ii) the minimum vesting period for share awards and options; and (iii) application of requirements concerning share schemes to subsidiaries of a listed issuer.

A summary of the proposals to be adopted as outlined in the Consultation Conclusions is set out below.

The new requirements will take effect on 1 January 2023. The HKEx Conclusions Paper can be found on the HKEx website here.

Chapter 17 HKEx Listing Rules Terms

The following table sets out the meaning of defined terms used in the newsletter. Reference to “Chapters” is a reference to chapters under the Listing Rules.

A subsidiary whose total assets, profits and revenue compared to that of the listed company’s group are less than:

(a) 10% under the percentage ratios for each of the latest three financial years (or if less, the period since the incorporation or establishment of the subsidiary); or

(b) 5% under the percentage ratios for the latest financial year

In respect of a listed company’s Share Schemes, Share Grants refer to grants of share awards and/or options over new shares of the company.

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.

A summary of main Listing Rule changes adopted as described in the Consultation Conclusions

The major modifications to Listing Rule requirements arising from the Consultation Conclusions are as follows:

• Role of Remuneration Committee and INEDs It was proposed by the HKEx that the Remuneration Committee be required to approve matters relating to the establishment and operation of Share Schemes that are considered unusual or require attention, namely (a) approving matters relating to Share Grants to Service Providers and Related Party Participants (including criteria for their admittance and the Service Provider Sublimit); (b) approving Share Grants that deviate from Chapter 17 requirements; and (c) approving Share Grants to Connected Persons. The HKEx will adopt relevant proposals (as further described below) except in respect of item (c) above, as respondents were concerned that approval of Share Grants to Connected Persons by the Remuneration Committee may weaken the oversight function, given the Remuneration Committee may include executive directors.
• Vesting period The HKEx proposed that a minimum vesting period of 12 months should be required for all Share Grants, unless a shorter vesting period has been approved by the Remuneration Committee in respect of Share Grants made to Employee Participants specifically identified by the listed company. Respondents considered that the length of vesting period should depend on actual commercial needs of the listed company and performance measures or criteria considerations of schemes may not necessarily be time based. After reviewing respondents’ comments, the HKEx agreed that listed companies should tailor the performance measures and retention policies based on their needs. It is proposed that listed companies should provide in its scheme documents the circumstances where Share Grants may have a shorter vesting period for Employee Participants.
• Share Schemes of subsidiaries Chapter 17 currently applies to subsidiary share option schemes “with appropriate modifications”. It was proposed by the HKEx that Chapter 17 also include share award schemes of subsidiaries, with exemptions provided for schemes of Insignificant Subsidiaries. After reviewing the comments from respondents (some of which pointed to operational issues or considered the proposals unduly burdensome or impractical), the HKEx decided to modify the proposal to require the application of Chapter 14 requirements to address potential dilution of subsidiary’s interest resulting from Share Grants under subsidiary Share Schemes (and apply Chapter 14A requirements on Share Grants to Connected Persons). Further, chapter 14 will be amended to measure disposals (granting existing shares) or deemed disposals (granting new shares or options over new shares) based on the size of the scheme mandate sought. Chapter 17 requirements will only apply to Share Schemes of a Principal Subsidiary.

Summary of proposals to be adopted

The following is a summary of proposals that will be adopted:

• Scope It was proposed that Chapter 17 be extended to govern all Share Schemes involving grants of share awards and grants of share options over new shares of the listed company, further to existing requirements. The HKEx decided to adopt this proposal and apply Chapter 17 to all Share Schemes funded by an issue of new shares by listed companies. Listed companies may award new shares utilising a general or specific mandate under Rule 13.36 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). Rule 17.01 (GEM Rule 23.01) will be amended to reflect this change.
• Eligible participants The HKEx proposed that eligible participants of Share Schemes should include Employee Participants, Related Entity Participants and Service Providers (including independent contractors) and that Share Grants to Related Entity Participants and Service Providers should be subject to approval of the Remuneration Committee, with reasons for the grants clearly explained in grant announcements of the listed company. This proposal will be adopted, with a small modification where the grant of Share Grants to Related Entity Participants and Service Providers would not be the responsibility of the Remuneration Committee but that of the Board (given that the Remuneration Committee is not involved in day to day operations of the listed company and may not have full grasp as to contribution of these non-employee participants to long term growth of the listed company). It should be noted that the definition of Service Providers expressly excludes auditors or valuers who provide assurance or who are required to perform services with impartiality and objectivity (i.e. they may not be an eligible participant of Share Schemes). Further, the HKEx may, upon establishment of a Share Scheme, require the INEDs to provide their views in the circular on whether the inclusion of non-employee participants to be in the long term interests of the listed company and its shareholders (i.e. in line with business needs or the industry norm etc.).
• Scheme mandate The HKEx proposed to apply a Scheme Mandate Limit not exceeding 10% of a listed company’s issued shares to all Share Schemes of the company. The mandate may then be refreshed by shareholders once every three years. Additional refreshments within a three year period would also be allowed, subject to the obtaining of independent shareholders’ approval (where the controller shareholder 3 ) should abstain from voting on the relevant resolution. The HKEx will adopt these proposal in order to protect minority shareholders by giving them the right to veto repeated refreshments of scheme mandate (especially considering that the fact that most Share Grants are made at nil consideration). However, independent shareholders’ approval is not required for a proportionate increase of the Scheme Mandate Limit following a pre-emptive issue, provided that the unused part of the scheme mandate (as a percentage to the relevant class of shares in issue) upon refreshment is the same as that immediately before the pre-emptive issue. Waivers from the Scheme Mandate Limit may be granted by the HKEx, taking into account factors such as specific circumstances of the listed company and the industry norm. Further, the HKEx proposed to remove the current requirements that the number of outstanding options should not exceed 30% of the issued shares from time to time. The HKEx adopted this proposal in light of the adoption of the Scheme Mandate Limit as the current 30% limit on outstanding options does not serve to effectively limit shareholding dilution resulting from Share Grants. The HKEx also proposed, as safeguard against excessive dilution arising from Share Grants to Service Providers, to require a listed company to set a Service Provider Sublimit within the Scheme Mandate Limit and disclose the basis for determining such sublimit in its circular to shareholders. The HKEx will adopt this proposal.
• Minimum vesting period for Share Grants The HKEx proposed that a minimum vesting period of 12 months should be required for Share Grants, unless a shorter vesting period is approved by the Remuneration Committee in respect of Share Grants made to Employee Participants specifically identified by the listed company, and that details of the grants should be disclosed in the grant announcement. Such a proposal is intended to align the purpose of Share Schemes to incentivise grantees to the listed company on a longer term basis. Having considered comments from respondents (including that it would be burdensome for the Remuneration Committee to explain all Share Grants with a shorter vesting period), the proposal will be adopted with the adjustment to allow the Board, at its discretion, to make Share Grants to Employee Participants with a shorter vesting period, provided that:
  • the scheme document sets out the specific circumstances where options or awards may be granted with a shorter vesting period. Any such arrangements must be clearly disclosed in the circular for the adoption of the scheme, with an explanation by the listed company’s Board as to why the arrangements are appropriate and how the grants of options of awards align with the purpose of the scheme (these disclosures will be subject to the HKEx’s review as part of its pre-vetting process of the listed company’s circular); and
  • the grant announcement states that the relevant circumstances that are specifically permitted by the scheme when a Share Grant is made with a shorter vesting period. Where the Share Grants are made to the listed company’s directors and senior management, the Remuneration Committee’s views on why a shorter vesting period would be appropriate.
  • grants of share awards to a director (other than an INED) or chief executive of the listed company in excess of 0.1% of the issued shares of the listed company over any 12-month period;
  • Share Grants (including grants of share awards and options) to an INED or substantial shareholder of the listed company in excess of 0.1% of issued shares of the listed company over any 12-month period; or
  • Share Grants (including grants of share awards and options) to a controlling shareholder of the listed company in excess of 0.1% of issued shares of the listed company over any 12-month period,

  and for the HK$5 million de minimis threshold to be removed for grants of share options to an INED or substantial shareholder of the listed company.

  With a view to both protect shareholders from excessive dilution and providing flexibility for listed companies to structure the remuneration package of directors and chief executives, the HKEx will adopt the proposed de minimis exemption for Share Grants to the said Connected Persons. The HKEx will also adopt the proposal to remove the HK$5 million threshold for grants of share options.

  • details of Share Grants by the listed company to participants on an individual basis (following the classification applied in grant announcement described in Proposal H) and other participants on an aggregate basis by category, and their movements during the reporting period;
  • for options and awards granted during the reporting period, their fair value at the time of grant and the accounting policy adopted;
  • the number of options and awards granted under all Share Schemes during the reporting period divided by the weighted average number of issued shares for the period; and the number of shares that are available for grant under the scheme mandate (and the Service Provider Sublimit, if applicable) at the beginning and the end of the reporting period; and
  • a summary of each Share Scheme (for annual reports only)

  This proposal will be adopted.

  • remove the requirement for announcement of Share Grants involving existing shares; and
  • require disclosure in annual reports of grants of existing shares to (i) directors of a listed company on an individual basis; and (ii) the five highest paid individuals in aggregate. Details of share grants to other participants can be disclosed on an aggregated basis.
  • Rule 3.13(2) – A director may still be considered independent if he/she receives shares or interests in securities from the listed company or its subsidiaries under share option schemes established in accordance with Chapter 17.
  • Rule 10.08(1) – The restriction on further issue of shares by a listed company within six months from its new listing on the HKEx does not apply to issuance of shares, the listing of which has been granted by the HKEx, pursuant to a share option scheme under Chapter 17.
  • Rule 13.52(1)(e)(ii) – A listed company should submit draft circulars for any matters relating to share option schemes required under Chapter 17 to the HKEx for review.
  • Paragraph 7 of Appendix 10 – The dealing restriction on securities transactions under the Model Code 5 does not apply to exercise of options that were granted before a period during which dealing is prohibited under the code at the exercise price pre-determined at the time of grant.

  In order to align the requirements applicable to Shares Schemes under other parts of the Rules, the HKEx will adopt the proposal. The issue of pre-vetting listed companies’ documents may be considered in future reviews.

  The amended Rules will come into effect on 1 January 2023 and has been approved by the board of directors of the HKEx and the Securities and Futures Commission of Hong Kong. Listed companies should comply with the amended Listing Rules for their Share Schemes before 1 January 2023. Transitional arrangements will be provided for existing Share Schemes that are valid on 1 January 2023. In summary:

  • for all existing Share Schemes, listed companies will be required to comply with the new disclosure requirements from the effective date of 1 January 2023, including announcements of grants of shares or options under these schemes and disclosures in interim or annual reports published on or after the effective date.
  • for share option schemes and share award schemes with Advanced Mandates which are still valid from the effective date, listed companies may continue to grant share awards or options only to eligible participants as defined in the amended Chapter 17. Listed companies 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.

  A more detailed look at the transitional arrangement is set out below: