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HKEX consultation on revision of share schemes rules

 
On 29 Oct 2021, HKEX published a consultation paper on proposed amendments to Listing Rules relating to share schemes. The consultation period will close after 31 December. (Press release; full document)

Firstly, it seeks to extend Chapter 17 of the rules to share award schemes involving issuance of new shares. Currently, it 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. It is also proposed to extend the rules to share schemes of subsidiaries.

Secondly, it proposes changes to specific Chapter 17 requirements. E.g. define “eligible participants” (currently no restrictions), revise scheme mandate refreshments, and improve disclosure.

The proposals aim to (i) provide issuers the flexibility to grant share awards and options, (ii) protect shareholders from excessive dilution.

Key proposals are summarised below. Please refer to the consultation paper for technical details (definitions (P.1); disclosure requirements (Appendix 1).

• 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) “service providers”
  — Grant to (ii) or (iii) must be approved by remuneration committee
  

• 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)

• Terms of grant
  — Minimum vesting period: 12 months, unless approved by remuneration committee
  — Require performance targets + clawback mechanism; disclose in grant announcements
  — (If made without the above) disclose remuneration committee’s views

• Limits on grant size: individuals or “connected persons”
  — (Retain) 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: remuneration committee approval (now: 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

• Disclosure: grant announcements, interim/annual reports
  — Disclosure on an individual basis in some cases
  — E.g. grants to “connected persons”

• Disclosure of work by remuneration committee (in corporate governance report)

• Extended to subsidiaries
  — Covers share options, share award schemes funded by new or existing shares
  — Exemption: “insignificant subsidiaries” (subject to approval by remuneration committee)
  — Whose total assets, profits and revenue compared to that of the issuer group are less than:
  (i) 10% under the percentage ratios for each of the latest 3 financial years; or
  (ii) 5% under the percentage ratios for the latest financial year
  

• Share Schemes funded by existing shares (i.e. no issuance of new shares)
  — Disclosure rules would apply

• HKEX acknowledges that some issuers make large share grants as part of remuneration strategy to incentivize and retain talents (e.g. internet-technology sector)
  — May consider granting waivers from the scheme mandate limit

What you should do:

• Note the consultation period, for making responses as appropriate

• Update your board and relevant teams on the broad proposals, after management’s initial assessment of the impact 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 proposals)

• For ongoing review of board committee/processes, note the increased responsibilities of remuneration committee, as well as disclosure of work done

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