The Hong Kong Stock Exchange (HKEx) adopted the proposed amended Listing Rules as set out in its Consultation Paper with certain amendments, including changes to share schemes of subsidiaries of listed issuers, share schemes funded by issuance of new shares of listed issuers, and share schemes funded by existing shares of listed issuers, among others. The approved amended Listing Rules will become effective on January 1, 2023.
This LawFlash published in November 2021 details the purpose and background of the original proposed rule amendments and the key amendments relating to share schemes of Hong Kong–listed issuers and their subsidiaries proposed by the HKEx.
To align with international practice, HKEx adopted the extension of Chapter 17 of the Listing Rules to govern all share schemes involving grants of share awards and grants of options over new shares of issuers as originally proposed.
HKEx originally proposed to extend the Chapter 17 requirement to share award schemes funded by new or existing shares of subsidiaries of the listed issuers, with some exemptions on disclosure requirements for the insignificant subsidiaries.
Considering the existing requirements of Chapter 14 and 14A on the share schemes of subsidiaries of the listed issuers, and the practical difficulties for issuers with a large number of subsidiaries, HKEx agreed to apply the requirement of Chapter 17 only to the share schemes of a subsidiary (a Principal Subsidiary) whose revenue, profit, or total assets accounted for 75% (or more) of that of the issuer under the percentage ratios in any of the latest financial years and no other subsidiaries. Given the significant size of the Principal Subsidiary to the issuer, the share grants by the subsidiary would have a dilutive effect on the issuer, similar to the share grant at the listed issuer level.
HKEx originally proposed to require the remuneration committee to approve the share grants (i) to service providers and related entity participants; (ii) to connected persons; and (iii) where the terms deviate from Chapter 17 requirements.
Considering that (i) it is not the remuneration committee's role to oversee the operation of the share schemes or share grants to employee participants who are not directors, senior management, or service providers; and (ii) the proposed change of the approving authority for grants to connected persons from Independent Non-Executive Directors (INEDs) to the remuneration committee would weaken the oversight function, HKEx therefore decided to amend the relevant proposed requirements as follows.
Eligible Participants
HKEx adopted the proposed definition of "eligible participants," but placed no requirement of the remuneration committee on the approval of the share grants to service providers and related entity participants for consistency with the remit of the remuneration committee.
Scheme Mandate
HKEx adopted the (i) application of scheme mandate limit of not exceeding 10% of an issuer's issued shares to share grants under all share schemes of the issuer, which may be refreshed by shareholders' approval once every three years, and may require independent shareholders' approval for refreshment of a scheme mandate within a three-year period; (ii) requirement that the service provider sublimit be set by the issuer within the scheme mandate limit; (iii) disclosure requirement of the basis for determining the sublimit in the circular to shareholders of the issuers; and (iv) removal of the current rule requirement that the number of outstanding options should not exceed 30% of the issued shares from time to time, as originally proposed.
Grant Terms
HKEx adopted the minimum vesting period of 12 months to align with the market practice but will allow the issuer to provide in its scheme documents the circumstances where share grants may have a shorter vesting period for employee participants.
HKEx acknowledged that issuers should tailor the performance measures and retention policies based on their needs and HKEx placed no requirement of the remuneration committee to approve where the vesting period is shorter than 12 months.
Share Grants to Individual Participants and Connected Persons
HKEx adopted the (i) extension of approval restriction for share grants to an individual participant in excess of the 1% individual limit to grants of share award; (ii) new de minimis exemption for grants of share awards to connected persons; and (iii) removal of the HK $5 million de minimis threshold for grants of share options to an INED or substantial shareholder of the issuer, but decided to keep the authority to grant shares awards to connected persons with INEDs rather than the remuneration committee as originally proposed.
Public Disclosure
HKEx adopted the proposed disclosure requirement in the annual and interim report and proposed announcement requirement of share grants as set out in Consultation Paper, but (i) removed the disclosure requirement on duration of the service contract, and (ii) added the disclosure requirement of the remuneration committee's views on (a) share grants to directors and senior management without performance targets and/or a clawback mechanism in the grant announcement; and (b) the reason why such share grants are appropriate and how the grants align with the purpose of the scheme where the vesting period for share grants to employee participants (involving the grants to directors and senior management) is shorter than 12 months.
Disclosure of Work Performed by Remuneration Committee
HKEx adopted the proposed disclosure requirement of material matters reviewed and/or adopted by the remuneration committee during the financial year, and agreed to provide such disclosure in either the Remuneration Report or the Corporate Governance Report.
Voting Rights of Unvested Scheme Shares
HKEx adopted that the trustee holding unvested shares of a share scheme shall abstain from voting on matters that require shareholder approval. However, HKEx decided not to require the disclosure of the number of unvested scheme shares in monthly returns, considering such disclosure requirement may be unduly burdensome and unnecessary given that the voting rights of the unvested shares are already restricted.
HKEx originally proposed to require the disclosure of terms of these share schemes funded by existing shares of the listed issuers and share grants, consistent with requirements applicable to share schemes funded by new shares.
Considering those share grants are no different from giving a cash bonus, and there are already requirements for disclosure of share awards to senior executives, HKEx agreed to make the disclosure balanced and informative by (i) removing the requirement for an announcement of share grants involving existing shares; and (ii) requiring a disclosure in annual reports of grants of existing shares to each director of the issuer on an individual basis and the five highest paid individuals on an aggregate basis.
The changes under the amended Listing Rules are significant. With these amendments, issuers and proposed issuers contemplating a listing on the HKEx and their subsidiaries may still be able to tailor share schemes for their individual needs to incentivize their employees and participants.
However, issuers and proposed issuers should pay careful attention to the amended Listing Rules and seek appropriate guidance in structuring their incentives for employees.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Hong Kong
Edwin Luk
Billy Wong
June Chan
Keith Cheung