New requirements on share option / award schemes to take effect on 1 January 2023

 
Current position

New requirements

Share schemes funded by issuance of new shares of listed issuers

Share award schemes

Chapter 17 currently applies to share option schemes, but not share award schemes.

To extend Chapter 17 to govern all share schemes.

Eligible participants

No restriction on the categories of eligible participants.

To define eligible participants of share schemes to include the following persons:

• “employee participants” – i.e. directors and employees of the issuer or any of its subsidiaries (including persons who are granted options or awards under the scheme as an inducement to enter into employment contracts with these companies);
• “related entity participants” – i.e. directors and employees of the holding companies, fellow subsidiaries or associated companies of the issuer; and
• “service providers” – i.e. persons who provide services to the issuer group on a continuing or recurring basis in its ordinary and usual course of business which are in the interests of the long term growth of the issuer group.

Scheme mandate

Chapter 17 limits grants of share options from all share option schemes of an issuer to 10% of its total issued shares (scheme mandate limit).

Issuers may seek approval from shareholders to refresh the scheme mandate at any time, provided that options outstanding do not exceed the 30% of the issued shares (overall limit).

To apply the current scheme mandate limit to all share schemes.

This mandate may be refreshed by shareholders’ approval once every three years. Refreshments within a three year period must be approved by shareholders of the issuer (other than the controlling shareholders of the issuer (or if there is no controlling shareholder, the directors (excluding independent non-executive directors (INEDs)) and chief executive of the issuer) and their associates).

To require the issuer to set a sublimit in respect of grants to service providers and disclose the basis for determining the sublimit in circulars. This sublimit must be separately voted on by shareholders.

To remove the overall limit.

Grants to individual participants

Grants of options to an individual under Chapter 17 are subject to shareholders’ approval if the number of shares covered by the grants exceed 1% of the shares in issue over any 12-month period (1% individual limit).

To apply the current 1% individual limit to all share schemes.

Grants to directors, chief executive or substantial shareholder of the issuer or an associate of any of them (connected persons)

Grants of options to an INED or a substantial shareholder of an issuer (or an associate of any of them) in excess of 0.1% of issued shares and HK$5 million in value over a 12-month period must be approved by shareholders (excluding the grantee, his/her associates and all core connected persons of the issuer).

Any grant of share awards to a connected person constitutes a connected transaction subject to independent shareholders’ approval regardless of the size of the grant.

Grants to a director (other than an INED) or the chief executive or any of their associates
To require approval by shareholders other than the grantee, his/her associates and all core connected persons of the issuer for grants of share awards in excess of 0.1% of the issued shares of the issuer over any 12-month period.

Grants to an INED or a substantial shareholder or any of their associates
To require approval by shareholders other than the grantee, his/her associates and all core connected persons of the issuer for grants of share awards and share options in excess of 0.1% of the issued shares of the issuer over any 12-month period.

Vesting period

Chapter 17 currently does not have specific requirements on vesting period.

To require a minimum vesting period of 12 months. Options or awards granted to employee participants may be subject to a shorter vesting period under specific circumstances as set out in the scheme document. Any such specific circumstances and an explanation by the issuer’s board of directors (or the remuneration committee where the arrangements relate to grants of options or awards to the issuer’s directors and/or senior managers) as to why the arrangements are appropriate and how the grants align with the purpose of the scheme must be clearly disclosed in the circular for the adoption of the scheme.

Performance targets and clawback mechanism

Chapter 17 currently requires an issuer to set out in the scheme documents any performance targets attached to the grants or a negative statement.

There is no specific disclosure requirement relating to a clawback mechanism where an issuer may recover or withhold any shares or options granted to a participant in the event of serious misconduct, a material misstatement in the issuer’s financial statements or other special circumstances.

To require disclosure (which may be qualitative) of the performance targets (if any) and a description of the clawback mechanism (if any) for all grants in the scheme documents and in grant announcements, and if none, a negative statement.

Where options or awards are granted to the issuer’s directors and/or senior managers without performance targets and/or clawback mechanism, the grant announcement must disclose the views of the remuneration committee on why performance targets and/or a clawback mechanism is/are not necessary and how the grants align with the purpose of the scheme.

Disclosure of details of grants to certain categories of participants on an individual basis

Under Chapter 17, an issuer must disclose details of option grants by way of announcement, and disclosure of grants to a connected person must be made on an individual basis.

To require disclosure of details of grants of options or awards to the following participants to be made on an individual basis:

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

Grants to other participants can be disclosed in aggregate by category, but the Exchange may require the issuer to submit a list of grantees.

Disclosure in financial reports

Chapter 17 requires an issuer to disclose certain details of option grants in its annual reports and interim reports and a summary of each share option scheme (for annual reports only).

To require disclosures in issuers’ annual reports and interim reports of, among other things:

• details of grants to participants and their movements during the reporting period;
• for options and awards granted during the reporting period, their fair value at the time of grant and the accounting policy adopted;
• the number of options and awards granted during the reporting period divided by the weighted average number of issued shares for the period;
• the number of shares that are available for grant under the scheme mandate (and the service provider sublimit, if applicable) at the beginning and the end of the reporting period; and
• a summary of each share scheme (for annual reports only).

Disclosure of work performed by the remuneration committee

An issuer is required to disclose in its corporate governance report a summary of the work performed by the remuneration committee during the year, including the committee’s work on determining the remuneration policy for executive directors, assessing their performance and approving the terms of their service contracts.

To require disclosure in the remuneration report or the corporate governance report of a summary of material matters relating to share schemes reviewed and/or approved by the remuneration committee during the financial year.

Approval for changes to terms of grant

Chapter 17 requires an issuer to seek shareholders’ approval for any changes to the terms of option granted.

To modify the current requirement such that changes to the terms of share award or option granted must be approved by the remuneration committee and/or shareholders of the issuer if the initial grant of the share award or option requires such approval.

Transfer of share awards / options to a trust or a private company

Share options may not be transferred by the grantee to other persons.

To provide a waiver to allow a transfer of share awards or options to a vehicle (including a trust or a private company) for the benefit of the grantee and his/her family members (e.g. for estate planning or tax planning purposes), provided that such transfer would continue to meet the purpose of the scheme and other requirements of Chapter 17.

Voting rights of unvested shares held by trustee

No specific requirement.

To clarify that the trustee holding unvested shares of a share scheme, whether directly or indirectly, shall abstain from voting on matters that require shareholders’ approval under the Listing Rules, unless otherwise required by law to vote in accordance with the beneficial owner’s direction and such a direction is given.

 
Share schemes funded by existing shares

Disclosure in financial reports

No specific requirement.

To require disclosure in the issuer’s annual report a summary of the share scheme and details of the grants of options and awards to (i) each director of the issuer; (ii) the five highest paid individuals during the financial year in aggregate; and (iii) other grantees in aggregate.

Voting rights of unvested shares held by trustee

No specific requirement.

To clarify that the trustee holding unvested shares of a share scheme, whether directly or indirectly, shall abstain from voting on matters that require shareholders’ approval under the Listing Rules, unless otherwise required by law to vote in accordance with the beneficial owner’s direction and such a direction is given.

 
Share schemes of subsidiaries

Share award schemes

Chapter 17 currently applies to share option schemes of issuer’s subsidiaries, but not their share award schemes.

Chapter 17 will apply only to share schemes of a principal subsidiary.

A “principal subsidiary” refers to 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.

Chapter 14 of the Listing Rules will be amended to address dilution of a subsidiary’s interest resulting from share grants under other subsidiary share schemes (and Chapter 14A to share grants to connected persons).

Listed issuer

Principal subsidiary

Other subsidiaries

Share option scheme

Share award scheme

Share option scheme

Share award scheme

Share option / award scheme

With advanced mandate

Utilising general mandate

Disclosure requirements
(in grant announcements and financial reports to be published on or after 1 January 2023)

Effective from 1 January 2023

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 options / awards must comply with Chapter 14 (based on the size of the scheme mandate for future grants) and/or Chapter 14A

Grants of share options / awards

The issuer may grant share options / awards only to eligible participants defined under the amended Listing Rules for financial years commencing on or after 1 January 2023

Scheme mandate

Issuers may continue to grant share options / awards using existing scheme mandate

Issuers may grant shares under general mandate until the second AGM after 1 January 2023

Principal subsidiary may continue to grant share options / awards using existing scheme mandate

Issuers must comply with Chapter 14 (based on the size of the scheme mandate for future grants) and/or Chapter 14A

Amendments of terms of scheme to comply with amended Chapter 17

On or before the refreshment of the scheme mandate limit / expiry of scheme mandate above or adoption of new share scheme