July 22 Legal Update
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HKEX consultation conclusions on revision of share schemes rules
(i) HKEX published consultation conclusions on proposed amendments to Listing Rules relating to share schemes. The proposals are largely adopted, effective from 1 January 2023 (“effective date”). (Press release, full report, FAQ)
Firstly, Chapter 17 of the rules will be extended to share award schemes involving issuance of new shares. They are also extended to share schemes (i.e. share option schemes and share award schemes) of “Principal Subsidiaries” (more details below).
(Background: currently, Chapter 17 governs share option schemes only. For share award schemes, issuers currently need to seek shareholders’ approval for each grant of new shares at a general meeting, or issue new shares under a general mandate).
Secondly, there are changes to specific Chapter 17 requirements. E.g. define “eligible participants” (currently no restrictions), revise scheme mandate refreshments, and improve disclosure.
The revisions aim to (i) provide issuers the flexibility to grant share awards and options, (ii) protect shareholders from excessive dilution.
There are some modifications to the original proposals, principally (i) not expanding the roles of remuneration committee (restricted to senior management and directors only) (ii) allows some flexibility in shorter vesting period (iii) covers share schemes of “Principal Subsidiaries” only.
Broad transitional arrangements: (i) new disclosure requirement from the effective date for all existing share schemes, (ii) issuers may make share grants only to eligible participants (under the amended rules) for financial years commencing on or after the effective date. They can continue to make such grants under existing share option schemes (or share award schemes with a specific mandate approved by shareholders) until refreshment or expiry of scheme mandate. (For details particularly re: share awards scheme, refer to Attachment to FAQ, P.13)
Key revisions are summarised below. Some aspects of the rules are technical (e.g. details on transitional arrangements; disclosure). Please refer to the FAQs and detailed Listing Rule changes (Appendix III to full report).
What you should know:
Summary of key changes
- Extend Chapter 17 to cover ALL share award schemes funded by issuance of new shares
- Define “eligible participants”
— Include directors and employees of the issuer or any subsidiary
(i) “employee participants”; (ii) “related entity participants” (directors and employees of holding companies, fellow subsidiaries or associated companies); (iii) (modified) “service providers”
- Scheme mandate limit
— Limit for all share schemes with issuance of new shares: not exceeding 10% of issued shares
— Refreshment: may be refreshed by shareholders once every 3 years; additional refreshments must be approved by independent shareholders
— Set (and disclose) a “service provider” sublimit
— Remove limit re: outstanding options (up to 30% issued shares)
- (Modified) Terms of grant
— Minimum vesting period: 12 months, unless disclosed in scheme document with explanation by the board and (where involving director/senior executives) remuneration committee
— Performance targets + clawback mechanism: (modified) disclosure in scheme document and grant announcements
- Limits on grant size: individuals or “connected persons”
— Individual participants: shareholder approval if shares issued/issuable per relevant share schemes granted in any 12-month period is above 1% of issued shares
— “Connected persons” (director, chief executive or substantial shareholder of the issuer or an associate of any of them)
(i) general: approval by independent directors
(ii) grant of share awards to director (not independent director) or chief executive: independent shareholder approval if above 0.1% over any 12-month period
(iii) grant of share options/share awards to independent director or substantial shareholder: independent shareholder approval if above 0.1% over any 12-month period
- (Modified) Disclosure: grant announcements, interim/annual reports, work done by remuneration committee
- (Modified) Extended to subsidiaries
— Covers share options, share award schemes funded by new shares or existing shares held by or for the issuer
— Scope: “Principal Subsidiaries”: 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 3 financial years
— Other subsidiaries: Chapter 14 modified to address dilution of subsidiary interest resulting from share grants under subsidiary share schemes (and Chapter 14A re: connected persons)
- Share Schemes funded by existing shares (i.e. no issuance of new shares)
— (Modified) disclosure rules
What you should do:
- Note the transitional arrangements
- Update your board and relevant teams on the broad proposals − after management’s assessment of the impact and proposed actions, including in light of the significance of share schemes on your group’s remuneration strategy
- Factors to be considered (e.g. whether your group has share options and/or share award schemes; impact of proposed overall limit; impact of proposed individual limits (particularly if independent shareholder approval needed); check if any subsidiary has share options and/or share award schemes and assess impact of the changes)
Also in this issue
Regulators
(ii) HKEX imposes a Director Unsuitability Statement against 6 former executive directors (including former chairman) and independent non-executive directors of China Creative Global Holdings Limited. (Announcement, Statement of Disciplinary Action)
The “Director Unsuitability Statement” is a public statement that, in HKEX’s opinion, each of the directors is unsuitable to occupy a position as director or within senior management of the company or any of its subsidiaries. It was introduced under the revised HKEX disciplinary regime (effective Jul 2021).
In this case, HKEX made enquiries with the directors in relation to the circumstances surrounding the company’s delay in the publication of its financial statements, the winding up of its major subsidiary and the disposal of its PRC subsidiaries.
One of the directors acknowledged receipt of HKEX’s reminder letter but still failed to respond to the enquiries. The other directors did not respond to the enquiries at all.
This case reflects HKEX’s view that directors who fail to comply with their obligation to cooperate with its enquiries and investigations are not suitable to be directors or members of senior management of an issuer.
(iii) HKEX censures Enterprise Development Holdings Limited, and imposed a Prejudice to Investors’ Interests Statement against a former executive director (“ED”) of the company. (Announcement, Statement of Disciplinary Action)
The “Prejudice to Investors’ Interest Statement” is a public statement that, in HKEX’s opinion, had ED remained on the board of the company, the retention of office by her would have been prejudicial to the interests of investors.
In Jan 2021, the company made an announcement on the appointment of ED (monthly remuneration: $300,000). Significant parts of ED’s biographical details were unsubstantiated and misleading.
It was found that ED had provided the company with inaccurate, incorrect and/or misleading information about her working experience. The company failed to conduct due diligence on it. Neither her appointment nor remuneration had been considered by the company’s nomination committee and remuneration committee respectively.
HKEX’s announcement states useful lessons learnt (summarised below).
What you should know/do:
Appointment of a director
- Listed issuers must properly consider an appointment in accordance with both the Corporate Governance Code and the terms of reference of its nomination and remuneration committee
- Due diligence required to confirm that a proposed director possesses the requisite character, experience, integrity and competence
- Remuneration committee: in determining remuneration, should consider what is fair and reasonable
- Nomination and remuneration committees: pivotal roles in the appointment of new directors
ESG resources
(iv) Hong Kong Chartered Governance Institute published a joint report with KPMG China and CLP Holdings “Climate Change Reporting: Imminent, Challenging & Mandatory – The Opening Moves” to help companies anticipate issues in adopting the forthcoming ISSB Board’s standards as regards sustainability/climate disclosure.
What you should know/do:
It highlights 5 focus areas under the forthcoming ISSB standards:
- Adopting the ‘Enterprise Value’ approach to materiality
- Quantifying the current and anticipated financial effects of climate issues
- Conducting climate-related scenario analysis
- Formulating the climate transition plan and setting the targets
- Determining and reporting on the metrics