Share award schemes to come under Hong Kong’s listing rules in 2023

A new regime defines eligible recipients, imposes a vesting period and sets a mandate limit but in practice will give shareholders less say over grants to connected parties, writes ACGA Head of Research Jane Moir.

Hong Kong is revising its listing rules to include share award schemes amid increasingly prevalent and dilutive equity incentive plans, particularly among China tech firms.

Issuers will be required to limit share awards—where new or existing shares are issued—to a defined group for the first time, and grants will be subject to a 10% mandate, refreshable every three years. A minimum vesting period of 12 months will be imposed. The rules come into effect on 1 January 2023.

The changes follow a consultation in October 2021 by Hong Kong Exchanges and Clearing (HKEX). ACGA’s submission can be read here. The Exchange last proposed extending Chapter 17 of the Listing Rules—which currently only covers grants of share options—in 1999 to include equity incentive schemes, but the plan was shelved. Since then, schemes involving the grant of shares have been governed by rules on general and special mandates, as well as connected transactions.

According to the HKEX consultation, the number of companies with share award schemes is growing. It puts the current figure at 14%, compared to nearly 80% of companies who grant options as incentives.

Most of the large China tech firms have generous equity incentive plans. The new rules however will not apply to several Hang Seng Index constituents, including Alibaba (until it moves to a dual primary listing), JD.com and NetEase, as they receive waivers from Chapter 17 as secondary listings.

Eligibility defined but not ideal

There will be greater clarity on who gets a share award and why. Directors and employees of the issuer, subsidiaries and related entities will qualify. No ex-employees, but grants to service providers received the green light, despite market pushback (ACGA included). A small tweak to the final rule will however see professional service providers such as placing agents and financial advisers explicitly excluded.

Related entity participants could include directors and employees of associated companies: in ACGA’s view this could give companies generous scope to compensate family members and close associates.

Connected parties: reality bites

As share awards move to Chapter 17, the requirement that grants to connected parties (governed by Chapter 14A of the listing rules) be disclosed and receive independent shareholder approval, regardless of size, will no longer apply.

Instead, shareholders will only get to vote on grants exceeding 0.1% of issued shares in 12 months to connected persons, such as directors and substantial shareholders. Any grant to an individual of more than 1% also requires shareholder approval.

In practice, this makes it more onerous for minority shareholders to vote down share awards to insiders and majority owners. Grants below 0.1% can still equate to substantial blocks of securities which can be awarded without any input from investors.

For large issuers, it seems unlikely that the threshold will be reached very often given the monetary values would have to be excessively high to warrant shareholder approval. Expect fewer instances of shareholder approval being required.

Perhaps one of the biggest disappointments is that this reduction in shareholder oversight also applies to awards given to INEDs—and we question the virtue of giving independents equity-based compensation in the first place. (As does the CG Code, which discourages the practice.)

Performance targets and clawbacks

The Exchange had proposed that the rationale and narrative around performance targets and clawbacks be disclosed, if they existed. If not, the remuneration committee should say why, and how the grants still serve their purpose.

It modified this in the final cut, opting to only require a description of the performance targets (qualitative narrative allowed), along with a negative statement where there were none. The emphasis appears to be on general descriptions, although the remuneration committee must still justify the lack of performance targets and clawbacks in respect of directors and senior management.

For further details please contact jane@acga-asia.org.

Full details of the HKEX consultation conclusions can be found here.