If you would like some further reading, see our previous article on the key changes
Since the amendments to Chapter 17 became effective on 1 January 2023, many Hong Kong-listed issuers have amended their scheme rules, specifically regarding the source of shares, to ensure they are compliant.
When it comes to existing share award schemes that involve grants of new shares under the general mandate, issuers may continue to grant share awards until the earlier of these two dates:
- the second annual general meeting (AGM) after 1 January 2023 or
- the adoption of a new scheme mandate or amendments of the terms of any existing schemes to comply with the amended Chapter 17.
For some issuers, the ‘second AGM’ deadline is only a few months away. Therefore, it’s crucial that you start reviewing your scheme rules, if necessary. Based on our experience, these are the key elements companies will need to review and consider:
Sourcing shares
There are several approaches to share sourcing that issuers can take including: using existing shares, issuing new shares or a mixture of both (hybrid). According to our experience with our clients, many like the flexibility of a hybrid approach, but they also prefer the simplicity of using existing shares.
The benefits of using existing shares are as follows:
- Reducing disclosure requirements
- Mitigating share dilution
- Utilising a trust model for flexibility
Very few companies choose to issue new shares due to the potential dilution issues, and if they do elect to, it’s usually smaller companies who may have concerns about cash flow.
Scheme Limit
A scheme mandate limit of 10% applies to all schemes involving the issue of new shares. In our experience, any unused portions will count toward the issue quota, even if they are from an existing scheme.
Disclosure requirements
The breadth and depth of disclosures required by listed companies are subject to the approach taken to source shares. To ensure you understand the disclosure requirements applicable in your company’s circumstances, discuss it directly with your employee share plan provider or legal advisor.
Additional considerations for companies issuing new shares or using the hybrid approach
- Eligible participant categories: These are limited to three categories: employee participants, related entity participants and service providers.
- Performance conditions: Companies should consider how to successfully manage grants that are contingent on performance conditions, and provide sufficient information as to how performance conditions are satisfied.
- Vesting schedule: A vesting period of at least 12 months is required, except for grants to employee participants that may be subject to a shorter vesting period in certain narrowly defined circumstances.
- Clawback mechanism: Companies should consider if they need to implement any clawback mechanisms to recover or withhold remuneration (including any awards or options granted) along with justification as to why clawback is/is not necessary.
- Trust deeds: when making amendments to your scheme rules, also keep in mind any associated impacts to your trust deed and ensure any resulting changes are implemented.
We highly recommend starting to review your scheme rules if you haven’t already begun. If you need any support or have any questions, please reach out to our team today.