Webinar on the HKEX’s proposed Listing Rule changes for listed company share schemes

Hi, everyone. I’m delighted to be here today to talk about the Consultation Paper published by the Hong Kong Stock Exchange on the proposed amendments to the Listing Rules relating to Listed Companies’ Share Schemes. Before we start, there are a few formalities I need to mention. The Law Society’s requirements for granting CPD points for this Webinar include that your understanding of today’s Webinar is tested, and so there’ll be a few multiple choice questions at the end of the Webinar.

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Turning now to the Stock Exchange’s Consultation Paper, which was seeking market feedback on its proposals to amend the Listing Rules, relating to Share Option schemes and Share Award schemes. I’m going to call these Share Schemes during this Webinar, and these are of Listed Companies and of their subsidiaries.

The Exchange published the Consultation Paper on the 29th of October, 2021 and the Consultation Period closed at the end of last year. The purpose of this Webinar is to give you a detailed explanation of the proposed Listing Rule amendments with reference to the current regime and the position of other jurisdictions.

Although the Consultation talks about proposed changes to Chapter 17 of the Main Board Listing Rules, which governs the Share Option schemes of companies listed on the Main Board, the proposals also apply to Chapter 23 of the GEM Rules which govern Share Option schemes of GEM Listed Companies. Currently Chapter 17 at the Listing Rules applies only to Listed Companies Share Option schemes, that’s schemes involving grants of options to acquire newly issued shares of the Listed Company.

It doesn’t cover Share Award schemes, which grant actual shares rather than options to acquire shares. The shares granted under a Share Award scheme can be either newly issued shares or Listed Companies’ existing shares, which they’ve purchased on market. Listed Companies use Share Option schemes and Share Award schemes to incentivize their employees and to align their interests with those of the Listed Company and its shareholders.

Recently, Share Award schemes have become more popular and in 2019, approximately 79% of Hong Kong Listed Companies had adopted Share Option schemes while around 14% had adopted Share Award schemes. Given this increasing popularity of Share Award schemes, the Hong Kong Exchange is proposing to extend Chapter 17 to cover Share Award schemes that are funded by issues of new shares, as well as Share Option schemes, creating a consistent regulatory framework for both types of Share Schemes.

Under the proposed changes to Chapter 17, the requirements that currently apply to Listed Companies’ Share Option schemes would also apply to Share Award schemes funded by the issue of new shares of Listed Companies. The Stock Exchange is also proposing to impose disclosure requirements for Share Award Schemes funded by Listed Companies’ existing shares.

The proposed Listing Rule changes would also give Remuneration Committees a greater role in overseeing the operation of Share Schemes and ensuring that grants of Share Awards or Options meet the scheme’s purpose. The Stock Exchange said in their aims, when putting forward these proposals, that it’s to give Listed Companies greater flexibility and to improve disclosure of grants of Share Awards and Share Options.

The Exchange is also proposing to amend number of other requirements. Under Chapter 17, the proposed changes include introducing a new definition of eligible participants and extending the limit on the number of new shares that can be issued on the exercise of Share Options, which is defined as the Scheme Mandate Limit to cover both Share Awards and Share Options schemes.

Other proposals include amending the requirements for refreshments of the Scheme Mandate Limit, introducing a requirement for companies to set a sub-limit for the number of shares granted to service providers and introducing a minimum 12 month vesting period. I’ll now go through the Stock Exchange’s consultation proposals in detail.

The Consultation’s main proposal is to extend the scope of Chapter 17 to apply to Share Award schemes funded by the issue of Listed Companies’ new shares, as well as Share Option schemes. As I mentioned previously, Chapter 17 of the Listing Rules currently applies only to Share Option schemes that are funded by the issue of new shares of the Listed Company, and doesn’t cover Share Award schemes.

In order to issue new shares under Share Award schemes, Listed Companies at the moment have to comply with the general requirements for the issue of shares under Chapter 13 of the Listing Rules. This means that for each grant of new shares under the Award scheme, Listed Companies need to either seek shareholder’s approval at a general meeting or issue the shares under a general mandate approved by shareholders.

Grants of new shares to connected persons under a Share Award scheme must also be approved by the company’s independent shareholders under Chapter 14A of the Listing Rules, irrespective of the size of the group. As mentioned the Stock Exchange is now proposing to extend Chapter 17 to cover Share Award schemes funded by newly issued shares of Listed Companies, so that Share Award schemes and Share Option schemes are subject to the same regulatory regime.

The Stock Exchange’s proposal to subject Share Award schemes funded by new shares to the same regulatory requirements as Share Option schemes is in line with requirements in other markets, the US, the UK, Australia, Canada, Malaysia, China, and Singapore – all apply one set of rules to all Share Schemes funded by the issue of new shares.

Share Award schemes that are funded by Listed Companies’ existing shares don’t require shareholders’ approval because these don’t dilute the interest of the company’s shareholders in the Listed Company. This wouldn’t change under the proposals. However, the Exchange is proposing to increase the disclosure requirements for Share Award schemes funded by existing shares of Listed Companies, and I’ll talk about that later.

The Stock Exchange is also proposing various changes to specific requirements of Chapter 17. The first of these proposals is to adopt a definition of eligible participants for Share Schemes and a new Listing Rule 1703A. There’s currently no restriction on who can be an eligible participant of a share scheme. Listed Companies need only disclose in the scheme document, the categories of eligible participants on the basis of determining participants eligibility.

The Stock Exchange is now proposing to restrict who can benefit from Listed Companies’ Share Schemes by defining eligible participants of Share Schemes to cover three categories of participants, employee participants, related entity participants and service providers.

The first category, employee participants will include the directors and employees of Listed Companies and their subsidiaries. Also included will be persons who are granted shares or options under the scheme as an inducement to enter into employment agreements with these companies. The second category, related entity participants will include the directors and employees of Listed Companies related entities, which are defined as holding companies, fellow subsidiaries, and associated companies of a Listed Company.

Share grants to related entity participants will have to be approved by the Listed Company’s Remuneration Committee and companies will have to explain the reasons for the grants and their announcements of share grants. The third category of eligible participants, service providers will include people who provide services to the listed group on a continuing and recurring basis in its ordinary and usual course of business. The services provided must also be material to the Listed Company’s long-term growth, something which will be determined by the Remuneration Committee of the Listed Company.

Examples of who would qualify as a service provider include those who would work for Listed Companies as independent contractors, where the continuity and frequency of their services to the Listed Company are similar to those of employees.

Service providers would also include advisors to biotech companies and consultants who provide services on a contract basis for specific projects or in locations where the company doesn’t have a presence. However service providers would not include placing agents or financial advisors providing fundraising or M&A services or consultants providing professional services to Listed Companies.

The Stock Exchange is proposing that Share Grants to service providers will have to be approved by the company’s Remuneration Committee, and the Listed Company will have to disclose the reasons for the Share Grants and how they would serve the purpose of the Share Scheme. That is to say, that companies will need to disclose how Share Grants would align with those of the Listed Company and its shareholders.

I will discuss the proposed Share Grant disclosure requirements in detail later. It’s also proposed that issuer’s Scheme Documents will have to clearly identify each category of service provider and the criteria for determining a person’s eligibility under each category. Another of the proposed safeguards for share grants to service providers is a Service Provider Sub-limit, which must be approved by the company shareholders.

Listed Companies would also be required to disclose on an individual basis, Share Grants to a service provider, in excess of 0.1% of the Listed Companies issued shares over any 12 month period. I’ll discuss these proposed safeguards in more detail in a moment.

As to how these proposals compare to those of other overseas markets, according to the Consultation Paper, offshore markets impose varying degrees of restrictions on who can participate in Listed Company shares. In Malaysia and China, eligible participants of Share Schemes are restricted to directors and employees of the Listed Companies group. In the UK employees and directors of the Listed Company’s holding company are eligible as scheme participants.

Singapore allows employees and directors of the Listed Company’s holding company group, provided that they have contributed to the success and development of the listed group and employees and directors of an associated company under the control of the Listed Company, to participate in Share Schemes.

These markets do not make specific provision for grants to be made to service providers. In contrast Australia, Canada, and the US allow participants such as service providers, consultants, and contractors, and in Australia, eligible participants also include employees or directors of a related entity of the Listed Company.

In Canada eligible participants include an insider of the Listed Company and the directors and officers of the insider. An example of an insider would be a substantial shareholder of the Listed Company. In the US, some Listed Companies have included employees of parent companies or associated companies as scheme participants. Australia and Canada impose bright-line criteria for service providers and contractors to be eligible participants of Share Schemes.

In Australia, asset regulatory guide 49 requires contractors to work a pro-rata equivalent of at least 40% of a comparable full-time position. The Canadian Listing Rules require service providers to have provided services for at least 12 months. The Hong Kong Exchange is not proposing any bright-line criteria for service providers.

Instead, Hong Kong Listed Companies would have flexibility in determining service provider’s eligibility criteria based on their business requirements. These eligibility criteria would however need to be disclosed in relevant circulars and approved by the Remuneration Committee of companies.

Currently, Chapter 17 of the Listing Rules limits the total number of shares that may be issued on exercise of options to be granted under all Share Option schemes at the Listed Company to 10% of the company’s issued shares as at the date of the shareholders approval of the limit. Listed Companies can seek shareholders’ approval to refresh the scheme mandate at any time, up to 10% of the issued shares, as at the date of approval of the refreshment provided that all outstanding options are not greater than 30% of the issued shares.

As the 10% Scheme Mandate Limit can be refreshed multiple times, Listed Companies can effectively issue Share Options for more than 10% of their issued shares. The Stock Exchange is proposing firstly, to extend the 10% Scheme Mandate Limit to all Share Schemes involving the issue of new shares so that it will apply to shares, to be issued under Share Award schemes, as well as Share Option schemes.

The Exchange also proposes to amend the refreshment mechanism so that a Scheme Mandate Limit may be refreshed by shareholders once every three years. Any additional refreshments within a three-year period would have to be approved by the Listed Company’s independent shareholders. That means the Listed Company’s controlling shareholders and their associates would have to abstain from voting on the additional refreshments. For companies with a controlling shareholder, the company’s executive and non-executive directors and chief executive would be required to abstain from voting.

The requirement for independent shareholder’s approval of additional refreshments within a three-year period would enable minority shareholders to veto these repeated refreshments, which would otherwise dilute their interests in the Listed Company.

Grants of new shares under share award schemes are typically made at nil consideration and thus tend to have a more dilutive effect on shareholders than grants of Share Options. This proposal would effectively allow share grants up to a maximum of 10% of the issued shares in three years, with an annual average of about 3.3% assuming there is no refreshment of the share mandate limits within the three year period. The Exchange notes in the Consultation Paper that it may consider granting waivers from the Scheme Mandate Limit where Listed Companies make large share grants as part of their remuneration strategy to incentivize and retain talent.

In determining whether to grant a waiver, the Exchange would take into consideration factors, such as the need for the proposed mandate, industry norms and the criteria for granting shares under the mandate.

The Exchange has guidance under Guidance Letter 97, 18 for listing applicants in the internet technology sector or that have internet based business models, noted that companies in these sectors often place greater emphasis on retaining and incentivizing talented people to develop their businesses,

and that the incentives offered are often provided through the grant of shares. The Guidance Letter says that therefore the Exchange would consider favorably granting waivers from the Scheme Mandate Limit and individual limits of 10% and 1% for Share Option schemes. The waivers are granted on a case by case basis and require the applicant to demonstrate the need for a higher cap and provide clear criteria for granting Share Options under the share scheme.

The Exchange is also proposing to remove the current Listing Rule requirement that limits the number of outstanding options to 30% of issued shares. The current rule does not govern the number of options that can be issued under share schemes, and given the 10% Scheme Mandate Limit, it’s rare for Listed Companies to have outstanding Share Options of 30% at any time.

Since the 30% limit has little, if any practical effect, the Exchange is proposing to remove it, looking at how the proposed Scheme Mandate Limit compares to requirements in other markets. Neither the Canadian nor the US Listing Rules impose a scheme mandate limit. Instead Canada and the US allows shareholders to approve the number of shares issuable under the scheme.

On the other hand, China, Singapore, Malaysia, and the UK imposed stricter limits on the number of shares issuable under share schemes. China imposes a Scheme Mandate Limit of 10% of the shares in issue at the time of shareholders’ approval. Singapore and Malaysia, impose a limit on share grants of 15% of the shares in issue from time to time while in the UK industry guideline, the principles of remuneration issued by the Investment Association limits share grants to 10% of issued shares in any rolling 10 year period.

The Exchange is proposing to require Listed Companies to set a sub-limit within the Scheme Mandate Limit on share grants to service providers, which it refers to as the service providers sub-limit. Its purpose will be to provide an additional safeguard against excessive dilution from share grants to service providers. The Listed Company will have to disclose in the circular to shareholders the basis for determining the service provider sub-limit and the Remuneration Committee’s views on whether the service provider sub-limit is appropriate and reasonable.

The Exchange believes that it’s appropriate for the Listed Companies Remuneration Committee to determine the service provider sub-limit based on the company’s business needs and remuneration policy, and that this should be disclosed to enable shareholders to make an informed voting decision.

The service provider’s sub-limit will also need to be separately approved by the company shareholders in general meeting.

Currently Chapter 17 doesn’t have specific requirements on the vesting period. In the Consultation Paper, the Stock Exchange is proposing to require a minimum 12 month vesting period. An exception to the minimum vesting period will be allowed where the Remuneration Committee approves a shorter vesting period for share grants made to employee participants specifically identified by the Listed Company and additional disclosures are made.

The grant announcement will have to disclose by category of participants, the quantity of the share grants, the approved vesting period, the reasons for adopting a shorter vesting period and an explanation from the Remuneration Committee as to why the arrangement is appropriate and how the share grants including the terms, serve the schemes purpose.

The Consultation Paper notes that some stakeholders consider that Listed Companies should have the option of making share grants with no, or a much shorter vesting period for particular purposes, such as rewards for past services provided. It explains however that this might not serve the purpose of Share Schemes, which is to incentivize grantees to contribute to the Listed Company’s long-term growth.

The proposal, therefore only allows the vesting period to be shortened if share grants are made to employee participants specifically identified by the issuer and under justifiable circumstances. An example given by the Exchange is where the grants would be subject to a clawback, if the grantees were to leave the Listed Companies employment before a minimum service period.

Other markets also require a minimum vesting period. For example, China requires a minimum vesting period of 12 months and Singapore options may be exercisable after one year from the date of grant or two years if the options are granted at a discount. In the UK, the industry guideline recommends a three-year vesting period and the corporate governance code requires a total vesting and holding period of five years for Share Awards to executive directors.

Chapter 17 currently requires a Listed Company to disclose in the scheme document any performance targets that must be achieved before the options can be exercised, or if none, a negative statement. The Exchange is now proposing that where share grants are made with performance targets, the grant announcement must include a narrative description of the performance targets attached to the share grants,

including the target levels and performance related measures such as earnings per share, or total shareholder return. The rationale for adopting the performance targets and the method for assessing whether they are satisfied.

Companies are not currently required to make specific disclosure relating to a clawback mechanism that allows the company to recover or withhold any shares or options granted to a participant in the event of serious misconduct, a material misstatement in the company’s financial statements or other special circumstances.

The Exchange is proposing that the scheme document must also include a description of a clawback mechanism, or if there’s no clawback and negative statements where share grants are made without performance targets and or a clawback mechanism, the circular for approving the scheme and the grant announcement must include the Remuneration Committee’s views on why performance targets and or a clawback mechanism are not necessary and how the grants serve the schemes purpose.

The purpose of these proposals is to allow shareholders to assess how share grants promote the interests of the Listed Company. The Exchange also notes in the Consultation Paper that it will consider granting waivers on an individual case basis, where there are concerns about disclosure of specific details which are confidential and commercially sensitive.

The Exchange’s proposals on performance targets and clawback mechanisms are in line with requirements in other international markets. The corporate governance codes and or corporate law in most international markets generally require the Listed Company to disclose performance measures and clawback on remuneration to directors and or key management personnel and annual remuneration.

Currently Chapter 17 requires that the exercise price of Share Options must be not less than the market price of the underlying shares. At the time of grant the Exchange is proposing to retain this requirement. However, the Exchange is not proposing to impose any restriction on the share price of shares under Share Award schemes. This is consistent with the market practice that Share Awards are typically granted at nil consideration.

Other markets with the exception of China, have no restrictions on the share grant price. The rules in China require the minimum grant price to be 50% of the market price. Currently shareholders approval is required under Chapter 17 for grants of options to an individual, if the number of shares covered by the grants exceeds 1% of the Listed Company’s issued shares over 12 month period.

Grants of Share Awards involving new shares can only be made with a general or specific mandate from shareholders. The Exchange is proposing to extend the Chapter 17 requirement for Share Option grants, to grants of Share Awards so that shareholders approval will be required if the number of shares covered by grants of Share Awards and Share Options to an individual participant in aggregate exceeds 1% of the Listed Company’s issued shares over a 12 month period.

Currently under Chapter 17 of the Listing Rules, each grant of Share Options to a director, chief executive or substantial shareholder of a Listed Company or their respective associates, which the Consultation Paper defines as connected persons, must be approved by the company’s independent non-executive directors, excluding any INED who is a grantee.

In addition, independent shareholders approval is required for grants of Share Options to INEDs or substantial shareholders or their respective associates. If the aggregate number of shares covered by the Share Options granted exceeds 0.1% of the Listed Company’s issued shares and they have a value over 5 million Hong Kong dollars over 12 months.

Currently any grant of Share Awards to a connected person constitutes a connected transaction under Chapter 14, eight of the Listing Rules and must be approved by the company’s independent shareholders, irrespective of the size of the group. The Exchange is proposing that all grants of Share Options and Share Awards to acquire new shares to connected persons must be approved by the Listed Company’s Remuneration Committee, excluding any director who is a grantee instead of it’s INEDs.

With respect to Listed Companies with Weighted Voting Rights structures, the Exchange is proposing to introduce an explicit requirement that the corporate governance committee must make a recommendation on any grants of Share Options or Share Awards to acquire new shares to a weighted voting rights beneficiary under listing rule 8 A 30.

This is because a weighted voting right beneficiary may be in a position to control the company’s board, given their superior voting rights. And there is a potential conflict of interest since the board would make the share grants to the weighted voting rights beneficiary. Currently any grant of Share Awards to a connected person constitutes a connected transaction under Chapter 14 A and must be approved by independent shareholders regardless of the size of the grant.

In respect to the independent shareholder approval requirement, the Exchange is proposing to introduce a new de minimis exemption for grants of Share Awards to connected persons. It’s proposed that where the grantee as a director other than an INED, or the chief executive of the Listed Company or an associate of a director, or the chief executive, independent shareholders approval will only be required if the proposed grant of Share Awards would result in the Share Awards granted to the individual, to represent an aggregate over 0.1% of the Listed Companies issued shares in any 12 month period. So grants of share awards that total 0.1% or less of the company’s issued shares in any 12 month period won’t require independent shareholders approval.

This proposal is aimed at achieving a balance between protecting the company’s shareholders from excessive dilution and giving Listed Companies flexibility in structuring their remuneration packages. The proposal will require all core connected persons to abstain from voting in favor of grants of share awards to a Listed Company’s directors other than INEDs, or its chief executive where the number of shares covered by the Share Awards exceeds 0.1% of its issued shares over 12 months.

The proposals are intended to enable minority shareholders to protect their interests by rejecting larger share grants to connected persons. The proposal will also, require all share grants to connected persons to be disclosed on an individual basis, and the Remuneration Committees views of the grants will be required to be included in the disclosure.

Where the grantee is an INED or a substantial shareholder of the Listed Company or their associate, the Exchange is proposing to require independent shareholders approval, if a proposed grant of Share Awards or Share Options would result in the aggregate number of shares covered by all grants of Share Awards and Share Options to the individual in any 12 month period to exceed 0.1% of the Listed Companies issued shares.

Accordingly Share Option and Share Award grants covering less than what 0.1% of the company’s issued shares will not need independent shelter approval. This will relax the current shareholder approval requirements for grants of Share Awards to Listed Companies connected persons.

The Exchange is also proposing to extend the de minimis exemption for grants of Share Awards to connected persons to controlling shareholders so that they would be subject to the same requirements that apply to substantial shareholders.

The Exchange is also proposing to remove the current 5 million Hong Kong dollars de minimis threshold for grants of Share Options to INEDs or substantial shareholders. This proposal will subject grants of Share Options and Share Awards to a higher level of scrutiny and is in line with changes to the corporate governance code, which came into effect on 1st of January, 2022, which adopted a new recommended best practice that Listed Companies should not give equity-based remuneration, including Share Options or grants with performance related elements to independent non-executive directors. This is because performance-related remuneration may lead to bias in INEDs decision-making and compromise their objectivity and independence.

Similarly substantial shareholders are usually in a position to control or exert influence over the board and the Exchange, therefore considers that grants of share options and awards to them should be subject to a higher level of scrutiny.

Chapter 17 currently requires a Listed Company to disclose details of option grants by way of announcement and disclosure of grants to a connected person must be made on an individual basis. In the Consultation Paper, the Stock Exchange is proposing to extend the current disclosure requirements to require the disclosure on an individual basis of grants of Share Awards and Options to three categories of persons.

The first category is connected person. The second category is related entity participants or service providers with grants representing shares in excess of 0.1% of the Listed Companies issued shares in any 12 month period. The third category is participants with share grants, representing shares in excess of the 1% individual limit.

Listed Companies will be able to disclose share option and award grants to other participants in aggregate by category. The Exchange may require a Listed Company to provide it with a list of grantees and the movements of shares and options granted to each grantee from time to time. The Exchange is also proposing that the grant announcement must set up various details of the share grants in a tabular format.

These include firstly, a description of each. Of the categories of grantees. If disclosure on an individual basis is required, the name of the grantee and if applicable, its ultimate beneficial owner. The relationship between the grantee and the listed group and where the grantee is a related entity, participant or service provider, the nature of services provided to the Listed Company and for a service provider, the duration of its service contract with the listed company.

The announcement will also need to include the date of grant, the number of options or awards granted, the exercise or grant price, the market price of the issuer’s shares on the grant date and for Share Options, the exercise period. The announcement will also need to disclose the vesting period. And if the vesting period is less than 12 months, the Remuneration Committee’s views on why that’s appropriate and how the grant serves the scheme’s purpose.

If the Share Option or Share Award includes performance targets, the announcement must include a narrative description of the performance targets, the rationale for adopting the performance targets and the method of assessing whether the targets are satisfied. If there are no performance targets, the Remuneration Committee’s views on why performance targets are not necessary and how the grant served the scheme’s purpose has to be included.

Disclosure must also be made of any clawback mechanism for the Listed Company to recover or withhold any awards or options granted, or if there is no clawback mechanism, the Remuneration Committee’s views on why a clawback mechanism is not necessary and how the grants serve the scheme’s purpose will need to be disclosed.

Where the Share Option or Share Award grant is to a service provider, a related entity participant, or a connected person. The reason for the grant and the Remuneration Committees views on why it’s appropriate to approve the grant, and the factors that it took into account must be disclosed together with how the grant serves the schemes purpose.

Listed Companies must also disclose in the announcement any arrangements made by the Listed Company or its subsidiaries to provide financial assistance to the grantee to facilitate the purchase of shares under the scheme.

The Exchange is also proposing that the announcement of a grant of a Share Option or Share Award must disclose the number of shares available for future grant under the Scheme Mandate Limit and the service provider’s sub-limit, if applicable.

The Exchange also says in the Consultation Paper, that it will consider granting waivers on an individual case by case basis, where there are concerns about commercial sensitivity or data privacy.

The Exchange is proposing that Listed Company’s interim reports and annual reports must include specified information. Firstly details of all grants of Share Options and Share Awards to each participant on an individual basis. If required under the proposal I just talked about and to other participants on an aggregate basis by category and their respective movements during the reporting period in a tabular format, and you can see this sort of format set out on this slide.

These proposed disclosure requirements are the same as the current Chapter 17 disclosure requirements applicable to Share Option schemes. The Exchange is also proposing to require disclosure of performance targets attached to the share options and awards granted during the reporting period.

Secondly for options and awards granted during the reporting period, it’s proposed that financial reports must disclose their fair value at the time of grant and their counting policy adopted. This is currently a recommended disclosure under Chapter 17 and respective Share Options. The Exchange is proposing to make it a mandatory disclosure requirement in relation to both Share Options and Share Awards.

It’s also proposed that the financial report should disclose the number of share options and awards granted under all Share Schemes during the reported period divided by the weighted average number of issued shares for the period. Disclosure is also proposed of the number of shares that are available for grant under the Scheme Mandate Limit.

And if applicable, the service providers sub-limit at the beginning and end of the reporting period, this proposed disclosure requirement is intended to enable shareholders to assess the dilution impact of the Share Schemes on their interests in the listed. For annual reports only the Exchange is proposing to introduce a requirement to include a summary of each share scheme.

This proposed disclosure requirement is the same as the current Chapter 17 disclosure requirement for Share Options schemes.

Currently a listed Company is required to disclose in its corporate governance report a summary of the work performed by the Remuneration Committee during the year, including the committees work on determining the remuneration policy for executive directors, assessing their performance and approving the terms of their service contracts.

Since the consultation proposals give the Remuneration Committee a major role in overseeing the operation of Share Schemes to ensure that share grants meet the scheme’s purpose, the Exchange is proposing that Listed Companies must disclose in their corporate governance reports, each share scheme related matter, reviewed and or approved by the Remuneration Committee during the financial year.

In the corporate governance report, the Remuneration Committee will also have to explain why it was appropriate to approve those matters. The factors it took into account such as the Listed Company’s business needs, remuneration policy and hiring practices and how the share grants served the purpose of this scheme.

With respect to service providers, it’s proposed, the Remuneration Committee would have to confirm in the Listed Company’s annual and interim reports that the service provider provided services to the listed group on a continuing and recurring basis in it’s ordinary and usual course of business, which are material to the Listed Company’s long-term growth. And as a result of that, it was determined to be an eligible participant of the share scheme.

Chapter 17 of the Listing Rules currently requires shareholders’ approval for any changes to the terms of a Share Option already granted. The Exchange is proposing that changes to the terms of a Share Award or Share Option already granted, maybe approved by the Remuneration Committee and or the companies listed shareholders. If the initial grant of the share award or option was approved by the list of company’s Remuneration Committee or its shareholders.

Currently a transfer of Share Options by the grantee to other persons is prohibited under Chapter 17. The Exchange is proposing to include a provision that it may consider granting a waiver to allow a transfer of shares, awards, or options to a trust, a private company or other vehicles for the benefit of the grantee, and his or her family members, for example, for estate planning or tax planning purposes, provided that it would continue to meet the scheme’s purpose and comply with Chapter 17’s other requirements.

Where a waiver is granted, the Listed Company would be required to disclose the beneficiaries of the trust or the ultimate beneficial owners of the transferee vehicle.

The Exchange is proposing that a trustee holding unvested shares of a share scheme must abstain from voting on matters that require shareholders’ approval under the Listing Rules. In addition, it’s proposed that the Listed Company must disclose the number of unvested shares held by the trustee of it’s share scheme and its monthly returns and the format prescribed by the Stock Exchange. The proposal aims to address concerns about undue influence over the exercise of voting rights of unvested shares by the Listed Companies management.

I’ll now talk about the proposals in the Consultation Paper relating to Share Awards funded by existing shares of listed companies.

Currently Share Award schemes funded by existing shares that are purchased on market don’t require shareholders’ approval under the Listing Rules, as they do not involve the issuance of new shares of the Listed Company. That position won’t change under the Exchange’s latest proposals Disclosure of share award schemes is currently governed by accounting standards.

In the Consultation Paper, the Exchange is proposing to require Listed Companies to disclose the terms of Share Award schemes and details of the grants of Listed Company’s existing shares and announcements of grants of shares, and in their financial reports.

The disclosure requirements will be the same as the proposed disclosure requirements applicable to Share Option schemes funded by the issue of new shares, which I talked about earlier.

The Exchange’s proposal is in line with requirements in comparable markets where corporate governance codes and corporate law generally require disclosure of details of equity-based compensation, including those funded by existing shares and Listed Company’s annual compensation or remuneration reports.

Required disclosures in other markets also include the movement of the securities granted and other particulars of the securities. For example, the market price, the performance conditions on the clawback mechanism. The Exchange is also proposing that the trustee holding unvested shares of share award schemes funded by a Listed Company’s existing shares must abstain for voting on matters that require shareholder’s approval under the Listing Rules.

And the number of unvested shares held by the trustee of a Listed Company’s Share Award scheme must be disclosed and its monthly returns in the format prescribed by the Exchange.

I’ll now talk about proposals relating to Share Schemes of subsidiaries of Listed Companies.

Currently Chapter 17 governs Share Option schemes of subsidiaries of Listed Companies that are funded by the issue of new shares. This is because grants of options over new shares of a Listed Company’s subsidiaries to scheme participants would dilute the Listed Companies interests in its subsidiaries.

The Exchange is proposing to extend the current requirements for Share Option schemes of subsidiaries, subject to the proposed modifications set up in the Consultation paper to also apply to subsidiary Share Award schemes, whether the schemes are funded by new shares or existing shares of the subsidiaries.

The rationale for this proposal is that Share Award schemes have the same dilutive effect on the Listed Company’s interest in its subsidiaries.

The Exchange is proposing to introduce an exemption to the shareholders approval requirements for share schemes of Listed Company’s insignificant subsidiaries, which the scheme involves grants of Share Awards or options to acquire new or existing shares of the subsidies. An insignificant subsidiary is defined in Chapter 14A of the Listing Rules as a subsidiary whose total assets, profits, and revenue compared to that of the listed group are less than 10% under the percentage ratios for each of the latest three financial years, or if less, the periods since incorporation or establishment of the subsidiary or 5% under the percentage ratios for the latest financial year. The Exchange is proposing to use the same definition for the purposes of this proposal.

Under the proposal the adoption of the share scheme by an insignificant subsidiary and its refreshment at the scheme mandate would be exempt from the shareholders’ approval requirement under Chapter 17, if they are approved by the Listed Company’s Remuneration Committee, the scheme complies with the other requirements of Chapter 17 and the subsidiary is still an insignificant subsidiary.

The Listed Company would still be required to comply with the Chapter 17 disclosure requirements in respect of the subsidiary, including the disclosure requirements for interim and annual reports and corporate governance reports. The aim of the proposal is to reduce the compliance burden on Listed Companies.

In particular, the proposal would give Listed Companies more flexibility to implement share schemes for subsidiaries that are not material to the listed group. If a subsidiary ceases to qualify as an insignificant subsidiary, after a share scheme is adopted, the Listed Company will need to comply with all Chapter 17 requirements from that day onwards, including the requirements to obtain shareholders approval for any subsequent refreshment of the Scheme Mandate Limit.

I’ll now talk about the proposals in respect of other Listing Rules relating to share schemes. The Exchange is proposing to amend Chapter 17, to clarify that the Chapter would apply to Share Schemes involving grants of shares or options through trust or similar arrangements for the benefit of participants specifically identified by the Listed Company prior to the grant.

This would include, for example, a subsidiary share’s scheme involving grants of unlisted shares into a trust to reward specified employees where each grantee is allocated units of beneficial rights in the trust based on their Share Awards, and the grantee would deal in the units and the trust rather than an underlying share.

Currently under Chapter 17, if a Listed Company proposes to adopt a new Share Option scheme, it’s encouraged to disclose in the circular the fair value of all options that can be granted under the scheme as if they’ve been granted at the latest, applicable date prior to the approval of the scheme.

The Exchange proposes to remove the recommended disclosure requirement. Instead, as I mentioned earlier, the Exchange is proposing to require disclosure of the fair value of Share Options and awards granted by Listed Companies in their annual and interim reports.

The Exchange is also proposing to apply to Share Award schemes, a number of Listing Rules that currently apply to Share Options. These include listing rule 3 13 2, which provides that a director may still be considered independent if they receive shares or interests in securities from the Listed Company or its subsidiaries under Share Option schemes established in accordance with Chapter 17.

Another Listing Rule to be applied to Share Award schemes is listing rule 10 0 8 1, which says that any restriction on any further issue of shares by a Listed Company within six months of its listing on the Exchange, doesn’t apply to the issue of shares the listing of which has been granted by the Exchange pursuant to a scheme under Chapter 17.

The Exchange is also proposing to apply listing rule 13 52 1 E Roman II to Share Award schemes. This would require Listed Companies to submit draft circulars for any matters relating to Share Awards schemes required under Chapter 17 to the Exchange for review. Share Award schemes would also be subject to paragraph seven of appendix 10 to the Listing Rules, according to which the dealing restriction on securities transactions under the model code for securities transactions by directors of listed securities doesn’t apply.

To the exercise of Share Options pursuant to an agreement entered into with a Listed Company before a period during which dealing is prohibited under the code, where options are exercised at the exercise price determined at the time of the grant of the Share Options.

In order to improve the clarity of Chapter 17 requirements, the Exchange is also proposing certain drafting amendments, such as rearranging the sequence of various requirements and deleting duplicative requirements. If the proposed revised Chapter 17 Share Schemes regime is adopted, the new Listing Rules would apply to new Share Schemes adopted on or after the effective date of the listing rule amendments.

The Exchange is proposing transitional. Provisions for existing share schemes that are valid as at the effective date of the revised Listing Rules. First, for all existing Share Schemes, whether funded by new or existing shares, listed Companies would be required to comply with the new disclosure requirements from the effective date.

This would include the requirements to announce grants of Share Awards or options under existing Share Schemes and to make disclosures in financial reports that are published on or after the effective date. The Exchange is also proposing transitional arrangements for Share Award schemes with advanced mandates and Share Option schemes, which are valid as at the effective date.

Advanced mandates are mandates additional to the general mandate for grants of new shares, under share award schemes, which the Exchange has allowed in specific cases. Under the proposed transitional arrangements, a Listed Company may continue to grant Share Awards or Share Options only to eligible participants under the revised Chapter 17, after the effective date, subject to certain requirements relating to refreshments.

In particular in respect to Share Option schemes, when the Listed Company refreshes the scheme mandate of its existing shares, it must comply with the revised Chapter 17 and amend the terms of the existing schemes accordingly.

As for Share Award schemes with advanced mandates, no further refreshment of the scheme mandate will be permitted. Another proposed transitional arrangement is that for Share Award schemes involving grants of new shares under general mandate, the Listed Company would be allowed to continue to grant Share Awards to eligible participants under the revised Chapter 17 until the date of the first AGM after the effective date. Thereafter the Listed Company should amend the scheme terms to comply with the revised Chapter 17. In the Consultation Paper, the Exchange set up 32 consultation questions on its proposals to amend the Listing Rules relating to Share Schemes of Listed Companies and their subsidiaries.

So that brings us to the end of the Webinar today. Thank you so much for joining me. I do hope that you enjoyed the Webinar and I hope you have a great evening and a good weekend. Thank you.