The revision of the Hong Kong Stock Exchange to Chapter 17 of the listing rules relating to the share plan of listed issuers will take effect on January 1, 2023, which includes a number of major changes, which will have a significant impact on the equity incentive scheme design, corporate governance and ESOP trust management of (proposed) listed companies in Hong Kong.

As a result of receiving a large number of inquiries from listed companies in the course of daily service to ESOP trust clients, Fortune Trust and Fortuan jointly held an online seminar on December 9, 2022, inviting senior partners and consulting lawyers of King & Wood Law firm and Securities Department to focus on answering questions of concern to listed companies. The following will explain the impact of the revision of Chapter 17 of the listing rules on listed companies and ESOP trusts and the corresponding measures.

I. the background and regulatory focus of the revision

On July 29, 2022, the Stock Exchange of Hong Kong issued a consultation summary on the proposed amendments to the listing rules relating to the listing of issuers' share plans and implemented the newly revised Chapter 17 rules (and subsidiary rules), which will come into effect on January 1, 2023. At the seminar, lawyer Gary, partner of King & Wood Law firm and Securities Department, pointed out that the new rules will apply to share plans involving the issuance of new shares by listed companies, including share option schemes and share incentive schemes, as well as to share schemes (including trust schemes) involving major subsidiaries of listed companies.

In addition, a number of new rules (mainly disclosure and trust voting arrangements) will also apply to share schemes (including trust schemes) involving existing shares of listed companies. The specific revised content and regulatory focus are interpreted by lawyer Ruth, a consultant of Jindu Law firm and Securities Department. For more details, please click on the video link at the end of the article or refer to the previous articles of Jindu Law firm."Stock Exchange rules apply to share option schemes and share incentive schemes of listed issuers from 2023 onwards"。

II. Application of ESOP Trust

According to Chen Jiaomei, director of Futu Trust, at the seminar, ESOP, that is, employee equity incentive scheme, is a participation mechanism for a company to attract, retain and motivate senior executives and key employees by allowing them to hold company stocks or options, enjoy benefit sharing and have the right to make business decisions. Through the establishment of ESOP trust to implement the incentive plan, it has the advantages of improving the performance incentive system, establishing the interest community of the company, and ensuring the safety of the company's equity.

According to data collected by Futu Trust from the open market, of the 120 Chinese stocks listed in Hong Kong with a market capitalization of more than US $1 billion between 2018 and 2021, 75 companies have set up employee trusts, accounting for 63%. This is only disclosed company data, and many companies have set up employee trusts that have not been disclosed in public channels.

In addition, from 2021 to November 30 this year, a total of 113 Hong Kong companies announced to buy shares from the secondary market through trusts, of which 46 listed companies have bought shares through trusts in the secondary market. Another 67 companies have announced that they will buy shares from the secondary market through trusts in the newly adopted share incentive scheme. It can be seen that the way of building ESOP trust and using the trust to buy shares from the secondary market has been gradually favored by listed companies. To learn more about the specific application of ESOP Trust buying shares from the secondary market, please click on the video link at the end of the article or refer to previous articles."who is the best choice between the repurchase of listed companies and the purchase of shares by trust? "。

III. The impact of the revision on the ESOP and trust of listed companies.

In view of the impact of the revision of Chapter 17 of the listing rules on listed companies and ESOP trusts, Futu Trust sorted out some practical issues that listed companies are more concerned about, such as the convergence plan of new and old plans, authorization limits, trust secondary market shares, and so on. During the seminar, Mr. Luo Weide, a partner of King & du Law firm and Securities Department, Mr. Liu Yingyuan, a consultant lawyer, Mr. Ben, CEO of Fortune Trust, and Mr. Sun Yuepeng (Andrew), partner of Fortune comfort, answered questions and questions at the round table. The following are the questions raised in the round table and the responses of the guests:

Q1: 17 what is the impact of the new rules on the equity incentive practice of listed companies? For example, how to connect the new and old ESOP incentive plans? What changes will the new regulations bring to the source and incentive mode of trust shares?

Andrew:Fu Tu Yi followed up and studied the implementation of equity incentives for listed companies in the three major capital markets of Hong Kong and the United States for three consecutive years in 2020, 2021 and 2022. It is found that the popularization rate of equity incentives implemented by companies listed in the United States is the highest. The popularization rate of equity incentive of companies listed in Hong Kong has been increasing year by year in the past three years, and many companies that have not implemented equity incentive before listing will also have the need to implement equity incentive within 6-12 months after listing. However, in the past, the Hong Kong listing rules only provided regular guidance for the share option incentive plans implemented by listed companies. With the increasing demand for equity incentives implemented by listed companies in Hong Kong, this rule obviously can no longer meet the needs of listed companies. Therefore, the issuance and implementation of the new rules, to a large extent, provide operational guidance for listed companies to meet the incentive needs of listed companies. To achieve healthy and stable development.

The new regulations not only play a better role in guiding and standardizing the implementation of equity incentives for listed companies, but also improve the supervision and disclosure requirements of the relevant incentive plans of listed companies, in order to strengthen the protection of investors, from the original application of stock options only, extended to all share plans and so on.

In the connection between the new and old plans, on the one hand, we should pay attention to the total limit of all the incentive plans in implementation, so as to avoid the non-compliance of the incentive plans implemented by the company; on the other hand, we also suggest that we should pay attention to the disclosure requirements of the old plans in accordance with the new rules and regulations. Incentive-related matters that need to be disclosed at time points such as grant, China report, annual report and so on.

The new rules in the traditional ESOP program design elements, such as: the source of shares does not change greatly, but in the incentive mode, ownership and unlocking settings are more clearly defined, and the application is more clear.

Q2 A has established an ESOP trust before listing, and has issued shares to the trust, but the list of motivating employees has not yet been determined. Company A hopes to wait until the list of employees is confirmed after listing, and then make grant and ownership arrangements.

(1) whether the shares held in the ESOP trust of Company A before listing can achieve the liquidity of listing? What should Company A do to comply with the new regulations?

Ruth:In the revised Chapter 17, the SEHK makes it clear in the relevant frequently asked questions (FAQ) that new shares granted under the scheme must be awarded to designated participants. Listed companies are allowed to grant shares or options to trusts or similar arrangements only if they are granted for the benefit of the designated participants. Therefore, the arrangement for company A to establish an ESOP trust to issue shares to the trust before listing does not comply with the revised provisions of Chapter 17.

The SEHK also mentioned in its frequently asked questions (FAQ) that if the trust shareholding arrangement of Company A did not comply with the revised Chapter 17, the SEHK would not give listing approval for the shares held by the trust. As the rights of all shares of the same class (including listing liquidity) are the same, if the SEHK does not give listing approval for the shares held by the trust, this will affect the approval progress of Company A's listing application. Therefore, in order to avoid affecting the listing application approval of Company A, it is recommended that Company A grant options and incentives to the designated participants or for their benefit, or cancel the relevant shares before listing.

However, we also note that the US Stock Exchange allows listed companies to issue inventory shares. in order not to affect the progress of approval of listing applications, we suggest that applicants for dual listing (dual listing) communicate the above matters with the SEHK as soon as possible.

(2) whether 100% of the trust assets of the ESOP trust set up by Company A before listing should be granted, and whether some of the trust assets should be granted to other candidates after listing?

Ruth:Take the above question. No, 100% of it needs to be awarded to the designated participant.

Q3: according to the requirements of the new regulations, a 10% scheme authorization limit will be imposed on all share plans of the issuer.

During the Pre-IPO phase, a company has set up an option plan (if the shares account for 3%), which will continue to be valid after listing. The company has completed its listing and now plans to adopt another restricted share plan:

(1) if the shares of the restricted share scheme are derived from newly issued shares, does the share authorization limit of the restricted share scheme and the option scheme that continues after listing need to be combined and the maximum shall not exceed 10%?

Ruth:The authorization limits of share incentive schemes and option schemes involving newly issued shares shall be consolidated and shall not exceed 10% of the relevant classes of shares issued by the listed company at the date of approval of the plan.

(2) if the shares of the option plan issued by the company before listing have exceeded 10%, what should be done?

Ruth:If the option plan issued before listing exceeds 10%, the option plan itself does not meet the requirements of Chapter 17 of the original listing rules, and listed companies are no longer allowed to grant option awards according to the plan after listing. Options granted by a listed company to or for the benefit of a designated participant before listing may continue to be valid after listing. The listed company must also fully disclose in the prospectus details of all options and incentives granted but not exercised, the dilution impact that such options may have on shareholdings after the listing of the company, and the impact of shares issued in respect of such options on earnings per share when exercised.

If a listed company wishes to establish a new share incentive plan or option plan, the listed company shall set up a plan in accordance with the provisions of revised Chapter 17 and obtain shareholder approval for the plan.

Q4 A will inject ESOP shares into the trust before listing, and there is a clear list of incentive employees, which has been granted, and the company intends to make vesting arrangements after listing. If, after the listing of the company, the performance is not up to standard or the rebate mechanism is triggered, the share awards can not be attributed to some employees, can the company award these share awards to other incentive objects?

Ruth:Under the premise that the plan complies with the revised Chapter 17 and survives after listing, the company may award the corresponding share awards to other incentives. The award shall be disclosed by public announcement in accordance with the provisions of revised Chapter 17.

Q5: under the new rules, share awards or options may be transferred to individual carriers (including trusts or private companies) for the benefit of grantees and their dependants, such as as estate or tax planning, provided that they apply to the Stock Exchange for exemption, and the transfer will continue to comply with the relevant scheme purposes and comply with the other provisions of Chapter 17. What do you think of the new rule from the trustee's point of view?

Ben:Under the new rules, there are two different situations:

1. Shares that have been granted but have not yet been vested: in principle, ownership of these shares has not been granted to the employee through vesting because the employee has not yet met some of the restrictions in the share plan. In this case, the transfer of shares and options needs to apply to the Stock Exchange for exemption.

two。 Already owned stock: if executives and employees have met the conditions for granting ownership and have the right to acquire ownership of the stock, and want to set up a family trust at the same time, the traditional practice is to first distribute the stock to the employee's personal securities account through the trust company, and then give the shares in the personal securities account to the holding company under the family trust through a free gift.

In practice, when we do the ownership and distribution of shares in the ESOP trust, we can make some arrangements, which may not need to be donated to the family trust through the securities account assigned to the individual, but can be directly allocated to the employee's family trust securities account directly through the wishes of the employees and the consent of the listed company. If Futu Trust is not only the trustee of listed company ESOP, but also the trustee of employee family trust, the overall KYC and process will be relatively simple.

Q6: an eligible employee receives a share or option award under the incentive plan, assuming that the employee terminates the maid relationship with the listed company in the future (for example, because of retirement, death or disability). Can the employee continue to hold outstanding share options or unvested share awards?

Gary:The revised Chapter 17 requires the provisions of the scheme to set out the circumstances relating to cancellation and automatic invalidation. Listed companies need to deal with relevant matters in accordance with the terms of the plan.

Q7: in the process of practice, what kind of solutions do listed companies generally adopt for employees who terminate their employment relationship?

Andrew:When the employee terminates the employment relationship and withdraws, the usual operating practice is that the rewards that have been owned, the options that have not been exercised, and the stocks that have been exercised will continue to be held by the incentive objectives. on the other hand, the unattributed reward and immature options will expire when the employment service relationship is terminated, and will no longer belong to the incentive object of departure. For the mature but unexercised options, when the employee leaves, the company can choose to let the employee continue to hold after the exercise of the right into real shares within a certain period of time.

There are also listed companies for compensation considerations, when employees terminate the service relationship due to retirement, death or disability and other special reasons, the incentive object or his heirs will be given the opportunity to speed up the exercise of power or accelerate ownership.

So how to deal with this part in the process of practice? Based on our practical experience, I think it can be divided into two parts: the first part is the core members, and we propose to discuss one matter at a time, because more "personalized" processing will be involved here. More extensive and in-depth communication is needed, and it is suggested that the first plan, the second plan and the third plan should be done well before communication, and each scheme should be adjusted according to the feedback of the communication object. So that the communication can be solved relatively satisfactorily. As for another part of the important non-core personnel, consideration can be given to communicating and dealing with them in accordance with the usual plan.

Q8: the new rules make it clear that a service provider (service provider) can be a qualified participant and a "service provider" is defined. Who does the qualified service provider include? is it limited to natural persons (not corporate entities)?

Ruth:A qualified service provider refers to a person who has been and continues to provide the issuer Group with services that are important to its long-term development in the course of its day-to-day business. Examples of service providers include those who work for the issuer as an independent contractor (whose services are continuous and frequent as employees), or consultants who provide services on a specific project or at places where the issuer does not have business on a contractual basis. For the avoidance of doubt, service providers do not include financial advisers or placing agents providing fund-raising or M & A services, or consultants providing professional services.

The service provider may be a natural person or corporate entity appointed by the issuer group to provide the service.

Q9: the Hong Kong stock market has been in the doldrums in the past two years, and more and more listed companies buy shares in the secondary market through trusts and grant them to company executives and employees.

(1) according to the new regulations, can listed companies first arrange trusts to buy old shares in the secondary market without determining the list of employees to be motivated in advance?

Ruth:Sure. The revised Chapter 17 does not impose restrictions on whether it is necessary for trusts to determine the list of incentives for buying existing shares from the secondary market.

(2) is the purchase of shares granted to employees through the trust secondary market limited to the 10% program authorization limit?

Ruth:The 10% authorization limit applies only to share incentive schemes and option schemes involving the issuance of new shares.

Q10: what is the experience and process of Futu Trust in buying shares in the trust secondary market?

Ben:Futu Trust has helped dozens of listed companies buy shares in the secondary market this year, especially when the share price was low some time ago.

Futu Trust predicts that the demand of listed companies for trust to buy shares from the secondary market will be relatively strong next year, because when the stock price is depressed, many listed companies buy back directly from the secondary market, but the buyback has certain drawbacks. After the buyback, the company's tradable shares will be greatly reduced, seriously and even affect the circulation status of the entire listed company. At the same time, the repurchased shares need to be cancelled, and the cash available to listed companies is also reduced accordingly. For listed companies, buying back directly from the secondary market is not the best solution, but buying shares in the secondary market through trust is a more flexible way. Futu Trust through Futu Securities, the use of algorithm trading can achieve a very efficient market-oriented order, so Futu Trust is more competitive in this respect.

Under the new rules, the use of trusts to buy shares from the secondary market is basically no different from previous operations, and companies can continue to buy shares at the right price from the secondary market through trusts. When the stock pool accumulates to a certain extent, the trust will gradually allocate shares to employees.

Q11: the new rules provide for the expansion of Chapter 17 of the listing rules to cover share incentive schemes involving new or existing shares of major subsidiaries.

(1) are the options and share incentive schemes of major subsidiaries subject to the 10% scheme authorization limit of the issuer?

Gary:Due to the different issuers involved, the options and share incentive schemes of the major subsidiaries are not limited to the 10% scheme authorization limit of the issuer. However, the options and share incentive schemes of the major subsidiaries are limited to the 10% authorization limit of the major subsidiaries themselves.

(2) does the listed company need to disclose the options and share incentive schemes of the major subsidiaries?

Gary:Right. Issuers are required to disclose options and share incentive schemes of major subsidiaries.

In addition to the issues involved in the round table, during the seminar, many viewers also raised questions about the new rules. the following are the questions raised by the live audience and the answers given by lawyer King du:

Q1: with regard to the new rules for the listing of H shares in Chapter 17, are the requirements the same as other ordinary Hong Kong stocks? is there anything that listed companies need to pay special attention to?

Ruth:From the newly revised dimension of chapter 17, like other ordinary Hong Kong stock companies, there is no place for H-share listed companies to pay special attention to.

Q2: before listing, I made an ESOP trust, injected trust assets, and also made a grant. After listing, how should the grant price be determined? Is there an exercise price limit like options?

Ruth:As mentioned earlier, the new amendment to Chapter 17 of the SEHK does not regulate the grant price of any share award scheme, and the SEHK has no special regulation on the exercise price of the pre-listing option scheme which will no longer be in effect after listing. But the Stock Exchange requires listing applicants to disclose in their prospectus what impact diluted or earnings per share will have on IPO.

Q3: if there is a restricted equity plan before listing and the implementation has not been completed, should it be counted in 10%?

Ruth:

1. If it has been granted but has not yet been assigned, it does not need to be counted in the 10% program authorization limit after listing.

two。 If shares are not granted after listing, the SEHK should not accept them under the new rules. Listed companies must grant all their shares to the designated beneficiaries before listing.

Q4: an ESOP trust was built before listing. If shares are donated by major shareholders to the trust for incentive, is it an old stock?

Ruth:It belongs to the old stock.

The above content is the focus of the seminar. For more information, please click on the following link to watch the playback of the seminar:

Review of the full version of the seminar on revision and interpretation of Chapter 17 of the listing rules of the HKEx

Interview with experts and introduction

Luo Weide Gary

Partners in the firm and Securities Department of King & Wood Law firm

Lawyer Luo Weide focuses on a wide range of transactions, including mergers and acquisitions, corporate financing and structural development, as well as capital markets. Locke's experience extends to private and public acquisitions, initial public offerings, corporate restructuring and privatization, and securities regulation in Hong Kong and China. Mr. Locke has advised foreign and Chinese companies and banks on a number of major Hong Kong-China transactions. Over the years, Mr. Locke has been rated as an outstanding lawyer by a number of legal guides and rating agencies. In 2014, Fortune 500 Asia Pacific Law quoted sources as saying that "lawyer Locke has' very keen business contacts'." Since 2012, Mr. Locke has been recommended as a prominent M & A lawyer in Hong Kong by the International Financial Law Review.

Liu Yingyuan Ruth

Consultant to the Company and Securities Department of King & Wood Law firm

Lawyer Liu Yingyuan's practice covers a wide range of corporate transactions, including corporate financing, mergers and acquisitions, takeovers and non-controversial regulatory compliance. Lawyer Liu often assists domestic and international clients in dealing with Hong Kong listings and mergers and acquisitions. She has extensive experience in private and private acquisitions, initial public offerings, corporate restructuring and privatization, as well as securities regulations in Hong Kong.

Lin Weibin Ben

Chief Executive Officer of Futu Trust

Master of Business Administration and Bachelor of laws, TEP, Honorary member of the Global Institute of Trust and Asset Planning (STEP), CFP, International Financial planner, engaged in cross-border wealth management and trust services for nearly 30 years, has served as Deputy Director of Trust Business of multinational Banking Group, General Manager of Retail Business Department and General Manager of Product Planning Department. Ben has rich experience in equity incentives, family trusts, charitable funds, private equity funds and family offices, and has provided equity incentive services to a number of listed companies in Hong Kong and the United States, as well as family trusts and funds for high net worth clients.

Sun Yuepeng Andrew

Rich and comfortable partner

Responsible for the operation, market and business growth of Forto TO B business, including corporate and institutional business. Has led a team to provide IPO distribution *, ESOP equity incentive management, IR investor relations, block trading and other diversified services for hundreds of leading Chinese enterprises. With more than 10 years of relevant experience in the financial industry, engaged in investment in the primary and secondary markets, and long-term concern for companies in the new economy. Before joining Futu, he worked in Junlian Capital and Shanghai Investment Morgan Fund. Investment cases include Bilibili Inc., Hanyi shares, Ruhan e-commerce and so on.

* Securities businesses such as IPO distribution are provided by licensed subsidiaries of Fortune.

Chen Jiaomei

Director of Futu Trust

Master's degree from Peking University and double Bachelor's degree from Huazhong University of Science and Technology, Global Institute of Trust and Asset Planning (STEP) STEP Affiliate. He has served as the Managing Director of Fortune Corporate Services, providing listing-related services for hundreds of listed companies in Hong Kong and the United States, including IPO distribution, ESOP trust and ESOP management, exercise / vesting and other full-process services.