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Updates to Regulatory Framework to Share Schemes in Hong Kong

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The new rules will become effective on 1 January 2023 (Effective Date). In Hong Kong, there are a number of variations of share schemes adopted by listed issuers. Share option schemes in compliance with Chapter 17 of the Main Board Listing Rules (MB Rules, and together with GEM Rules, Rules)1 involve the issue of new shares and grantees pay a price for such shares. Share award schemes may involve grants in respect of new shares or are funded by existing shares of the listed issuer purchased on-market, but are typically for nil consideration and, therefore, considered to be more dilutive to shareholders. The new rules intend to level the playing field when it comes to regulating the grants involving the issue of new shares, whether they be granted under share options schemes or share award schemes (together, Share Schemes). There are also some new rules to govern disclosures in respect of grants under share award schemes funded by existing shares of the listed issuer purchased on-market.

Change to rules

Highlights of the key changes to Share Schemes involving the issue of new shares are as follows:

Updates to Regulatory Framework to Share Schemes in Hong Kong table 1 

Highlights of the key changes to Share Schemes involving existing shares of listed issuers are as follows:

None of the above (except the restriction on trustee voting for unvested shares) will apply to share award schemes funded by the issuer but where grants are in respect of share awards funded by existing shares of the listed issuer. Note though new requirements for disclosure in annual report.18

Chapter 17 to apply to principal subsidiaries

The present Chapter 17 applies to share option schemes of a listed issuer and any of its subsidiaries.

In light of the comments received on the rationale of Chapter 17, i.e. to govern dilution of interest in the issuers’ securities, under the amended Rules the requirements of Chapter 17 will only apply to share schemes of a principal subsidiary, i.e. a subsidiary whose revenue, profits or total assets accounted for 75% or more of the issuer in any of the latest three financial years. It shall be noted that the scheme mandate for Share Schemes of each principal subsidiary should be calculated with reference to the total issued shares of that subsidiary and not the issuer.19

For Share Schemes of other subsidiaries, they will be governed under Chapter 14 and Chapter 14A as disposal (of existing shares of subsidiaries) or deemed disposal (where new shares or options over new shares are granted).20

Effective Date and transitional arrangements

The new disclosure requirements will take effect on the Effective Date. The limits on participants will applies for financial years commencing on or after the Effective Date.

For Share Schemes with existing scheme mandate, issuers may continue to make share grant with such mandate, and the terms of the schemes must be amended to comply with the amended Rules on or before the refreshment or expiry of scheme mandate.

For share award schemes that utilise general mandate, issuers may continue to grant shares under the general mandate until the second AGM after the Effective Date.

See below table21 for transitional arrangement details: