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

n 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 Issuers1 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.

1% Individual LimitThe limit on Share Grants to an individual participant over any 12-month period, which, without shareholders’ approval, must not exceed 1% of the issued shares of the listed company (or, for a subsidiary scheme, its subsidiary)
Advanced MandateAn advanced specific mandate approved by shareholders of a listed company for granting new shares under a share award scheme
BoardBoard of directors of a company listed on the HKEx
Connected PersonA director, chief executive, or substantial shareholder of the listed company or an associate of any of them
Employee ParticipantsDirectors and employees of the listed company 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)
INEDsIndependent non-executive directors of the listed company
Insignificant SubsidiaryA 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
Listing Rules or the RulesThe Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited2 (Main Board, unless otherwise stated)
Principal SubsidiaryA subsidiary whose revenue, profits or total assets accounted for 75% (or more) of that of the listed company under the percentage ratios in any of the latest three financial years
Remuneration CommitteeRemuneration committee to the Board
Related Entity ParticipantsDirectors and employees of the holding companies, fellow subsidiaries, or associated companies of the listed company
Scheme Mandate LimitThe limit on Share Grants under all Share Schemes of a listed company (or, for a subsidiary scheme, its subsidiary) approved by its shareholders, which must not exceed 10% of the issued shares of the company (or the subsidiary) at the date of the shareholders’ approval of the limit
Service ProvidersPersons who provide services to the listed company’s group on a continuing and recurring basis in its ordinary and usual course of business which are in the interests of the long-term growth of the company’s group
Service Provider SublimitA sublimit under the Scheme Mandate Limit for Share Grants to Service Providers
Share GrantsIn 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.
Share SchemesBoth share option schemes and share award schemes

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.

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