Legal development

Revised rules for share schemes of HK listed companies

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    Chapter 17 of the current HK Listing Rules (Chapter 17) apply to share option schemes of listed issuers and their subsidiaries, but do not apply to share award schemes. In light of the increasing number of share award schemes adopted, the Exchange has decided to extend Chapter 17 to cover share award schemes as well. The Exchange has also taken the opportunity to amend Chapter 17 in certain specific areas.

    These changes are set out in the Exchange's consultation conclusions dated July 20221 . The amended Chapter 17 will take effect on 1 January 2023.

    Background

    Share schemes (i.e. share option schemes and share award schemes) serve as an incentive to employees to contribute to the listed company on a longer term basis. They are different from other forms of remuneration (such as cash) due to the dilutive impact on public shareholders resulting from the issue of new shares.

    Share option schemes are funded by new issuances of shares and are currently regulated by Chapter 17.

    Share award schemes may be funded by new issuances of shares or existing shares. The current Chapter 17 does not apply to share award schemes.

    Key changes

    The main changes to Chapter 17 are summarised below. The changes cover three main areas:

    • share schemes funded by new shares;
    • share schemes funded by existing shares; and
    • share schemes of subsidiaries of listed companies.
     Current positionRevised Position 
    ScopeOnly applies to share option schemes.
    Applies to all share schemes (i.e. both share option schemes and share award schemes).
    Share schemes funded by new shares
    Eligible participants No restrictions.

    Share grants may only be made to the following groups of eligible participants:

    • Employee Participants;
    • Related Entity Participants; and
    • Service Providers.

    Employee Participants

    This includes directors and employees of the listed issuer and its subsidiaries. There is no differentiation between full-time and part-time employees, but it does not include former employees.

    Related Entity Participants

    This includes directors and employees of the holding companies, fellow subsidiaries or associated companies of the issuer. It does not include directors and employees of investee companies.

    Service Providers

    This includes persons who provide services to the issuer group on a continuing or recurring basis in its ordinary course of business, which are in the interests of the long term growth of the issuer group.

    Scheme mandate limit
    • Limits grants from all share option schemes to 10% of the issuer's total issued shares.
    • The scheme mandate may be refreshed any time with shareholder approval, provided that the outstanding options do not exceed 30% of issued shares.
       
    • Limits grants under all share schemes to 10% of the total issued shares.
    • Shareholders may refresh the scheme mandate once every 3 years.
    • Independent shareholders may make additional refreshments within the 3 year period.
    • Need to set a sub-limit for grants to Service Providers.
    Minimum vesting period No specific requirement.
    • Minimum 12 month vesting period required for options and awards.
    • The board may make grants to Employee Participants with a shorter vesting period. Additional disclosure requirements apply.
    • No shorter vesting period is permitted to grants to non-Employee Participants.
    Performance targets and clawback

    Disclose performance targets or a negative statement.

    No specific disclosure requirement for clawback

    •  Disclose a description of the performance targets (which may be qualitative) and clawback, or a negative statement.
    • If performance targets / clawback do not apply to grants to directors or senior management, disclose renumeration committee’s view on why this is the case.
    Grant price  Exercise price must not be below market price of the underlying shares at the time of the grant.

    Share options – No change to the current rule.

    Share awards – The rule for share options is expressly disapplied in the case of share awards.

    Restrictions on share grants to individuals

    Share options – Shareholder approval is required for grants over 1% of the issued shares over a 12 month period (1% individual limit).

    Share awards – No specific limit.

     

    Extend the 1% individual limit to all share schemes (in aggregate).

    Restrictions on share grants to executive director, non-executive director, chief executive

    Share options:

    • Approval by INEDs is required.
    •  Shareholders’ approval is required if the grants of share options exceed 1% of the issued shares of the issuer over any 12-month period.

    Share awards:

    • Grants of new shares to connected persons constitute a connected transaction requiring independent shareholders’ approval regardless of the size of the grant.

    (a) Subject to (b), approval by the INEDs.

    (b) Independent shareholders’ approval is required if the grants of share awards will cause the share awards granted to exceed 0.1% of issued shares of the issuer over any 12 month period.

    Note: Shareholders’ approval is required if the grants of share awards and share options in aggregate exceed the 1% individual limit

    Restrictions on share grants to INEDs and substantial shareholder

    Share options:

    • Approval by INEDs (excluding any INED who is a grantee) is required.
    • Independent shareholders’ approval is required for grants of options in excess of 0.1% of the issued shares of the issuer and $5 million over a 12-month period.

    Share awards:

    • Grants of new shares to connected persons constitute a connected transaction requiring independent shareholders’ approval regardless of the size of the grant.

    (a) Subject to (b), approval by the INEDs (excluding any INED who is a grantee).

    (b) Independent shareholders’ approval is required if the grants of share awards and share options in aggregate exceed 0.1% of issued shares of the issuer over any 12 month period.

    Disclosure in announcementsDisclosure of grants to a connected person must be made on an individual basis.

    Disclosure of grants of options / awards to the following should be made on an individual basis:

    • a connected person;
    • any individual with grants exceeding the 1% individual limit; and
    • a related entity participant or a service provider with grants exceeding 0.1% of the issuer’s issued shares over any 12 month period.

    Information relating to other grantees may be disclosed by category.

    Changes to terms of share award / option granted Shareholder approval is required.  Approval by the approving authority (board / remuneration committee / INEDs / shareholders) making the initial grant.
    Transfers of share options / awardsShare options may not be transferred by the
    grantee to others.
     
    The Exchange may grant a waiver to allow transfers of share awards / options to a vehicle for the benefit of the grantee and his/her family. 

    Voting rights of unvested scheme shares

    No specific restriction. Trustee holding unvested shares shall abstain from voting, unless required by law to vote.
     Share schemes funded by existing shares
    Disclosure Based on accounting standards.

    Grants to the following grantees should be disclosed in annual reports:

    • each director of the issuer on an individual basis;
    • 5 highest paid individuals on an aggregated basis; and
    • other participants on an aggregated basis.

    Details to be disclosed in the annual report should follow the general disclosure requirements in annual reports applicable to share schemes funded by new shares.

    Voting rights of unvested scheme sharesNo specific restriction.Trustee holding unvested shares shall abstain from voting, unless required by law to vote.
     Share schemes of subsidiaries of listed issuers
     Principal Subsidiaries Chapter 17 governs share option schemes of all subsidiaries.

    For both share option schemes and share award schemes involving either new shares or existing shares of the subsidiary:

    • Chapter 17 will only apply to Principal Subsidiaries; and
    • for other subsidiaries, revised Chapter 14 of the Listing Rules (Chapter 14) will apply.

    A Principal Subsidiary is a subsidiary 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 three financial years.

    Other subsidiaries (that are not Principal Subsidiaries)

    Chapter 14 will be revised to apply in such situations.

    If the subsidiary adopts a share scheme (either involving new shares issued by the subsidiary or existing shares held by the parent listed company), the issuer will need to consider whether it is a notifiable transaction.

    Disclosure and shareholder approval requirements will depend on how the transaction is classified under Chapter 14. The announcement or circular must contain the major terms of the share scheme.

    The above two points also apply if the subsidiary proposes to increase or refresh the scheme mandate, or makes a material change to the terms of the scheme.

    Effective date and transitional arrangements

    The amended Listing Rules will be effective on 1 January 2023.

    However, issuers may adopt the amended rules for their share schemes before the effective date.

    Transitional arrangements apply for existing share schemes.  Refer to the tables2  below for details. 

    Listed Issuer 


    Listed issuer
    Share option schemeShare award scheme
    With Advanced MandateUsing general mandate
    Disclosure in announcements, interim and annual reportsFrom the effective date (1 January 2023) 
    Share grants to eligible participants (new definition)New definition of eligible participants applies for financial years commencing on or after 1 January 2023
    Scheme mandate

    Issuers may continue to make share grants using the existing scheme mandate

    Note: No further refreshment of the Advanced Mandate is allowed


    Issuer may continue to grant share awards to eligible participants up to the earlier of:

    (i) the second AGM after 1 January 2023 or

    (ii) the adoption of a new scheme mandate or amendments to the terms of the existing scheme to comply with the amended Chapter 17

    Amendment of terms of scheme to comply with revised Chapter 17 On or before the refreshment of the scheme mandate limit / expiry of scheme mandate above / adoption of new share scheme

    Principal Subsidiary

     

    Principal Subsidiary

    Share option scheme Share award scheme 
    Disclosure in announcements, interim and annual reports From the effective date (1 January 2023)
    Share grants to eligible participants (new definition)New definition of eligible participants applies for financial years commencing on or after 1 January 2023
     Scheme mandateSame as listed issuer
    Issuers must comply with Chapter 14 (based on the size of the scheme mandate for future grants) and/or Chapter 14A before making share grants
    Amendment of terms of scheme to comply with revised Chapter 17On or before the refreshment of the scheme mandate limit / expiry of scheme mandate above / adoption of new share scheme

    Other subsidiaries (share option schemes / share award schemes)

    • Share option scheme that has complied with existing Chapter 17: 

      • The subsidiary may continue to grant share options under its scheme mandate
    • Other existing or new share schemes:
      • Grants of share awards or options must comply with Chapter 14 (based on the size of the scheme mandate for future grants) and/or Chapter 14A

    For further information, please reach out to your usual contact at Ashurst or the partners mentioned below.


    1. Proposed Amendments to Listing Rules relating to Share Schemes of Listed Issuers and Housekeeping Rule Amendment
    2. Based on HKEX FAQ 099-2022, with a few modifications.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.

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