SFC Share Option Scheme Regulation for Listed Issuers: Grant Conditions and Disclosure Requirements

The Hong Kong Securities and Futures Commission (SFC) and The Stock Exchange of Hong Kong Limited (HKEX) have intensified scrutiny of share option schemes (SOS) as a tool for executive compensation and employee retention. In 2024, HKEX amended the Listing Rules to impose stricter limits on scheme mandate renewals and to mandate shareholder approval for grants to connected persons. These changes, effective from 1 January 2025, directly impact how listed issuers design, approve, and disclose their share option grants. For compliance officers and in-house counsel, the new regulatory framework demands a precise understanding of grant conditions, discount restrictions, and disclosure timelines. Failure to comply can result in trading suspensions, regulatory sanctions, and shareholder litigation. This article sets out the current regulatory requirements under the HKEX Listing Rules (specifically Chapter 17) and the SFC’s Code on Takeovers and Mergers where applicable, providing a procedural guide for listed issuers and their advisors.

Grant Conditions under HKEX Listing Rules Chapter 17

Eligibility and Grant Limits

The HKEX Listing Rules, as amended in 2024, specify that only employees, directors, and certain service providers of the listed issuer or its subsidiaries are eligible to receive share options. Consultants and advisers who provide services on a continuous basis may also be eligible, but only if the board determines their participation is appropriate. The Rules prohibit granting options to any person who is a connected person (as defined in the Listing Rules) unless the grant is approved by independent shareholders.

The maximum number of shares that may be issued upon exercise of all outstanding options under a scheme must not exceed 10% of the issued shares of the issuer at the time of the scheme’s approval. A further 10% limit applies to any renewal of the scheme mandate, which requires separate shareholder approval. As of 2025, HKEX does not permit a rolling mandate that automatically renews without a fresh vote.

Pricing and Discount Restrictions

The exercise price of a share option must be at least the higher of: (i) the closing price of the shares on the date of grant; (ii) the average closing price of the shares for the five trading days immediately preceding the date of grant; and (iii) the nominal value of the shares. This is a mandatory floor. No discount is permitted under the standard Listing Rules, although the SFC may grant a waiver in exceptional circumstances.

For options granted to employees, the issuer must ensure the exercise price is not set at a discount that would constitute an inducement to participate. The SFC’s 2024 guidance on share schemes for listed issuers (SFC Circular dated 15 March 2024) clarified that any discount must be expressly justified in the board resolution and disclosed in the annual report.

Timing of Grants

Grants cannot be made during a close period as defined in the Listing Rules. The close period is the period of 60 days immediately preceding the publication of the annual results or, if shorter, the period from the end of the relevant financial year up to the publication of the results. For quarterly or half-year results, the close period is 30 days. Grants made during a close period are void unless the board obtains a waiver from HKEX.

Disclosure Requirements for Share Option Grants

Immediate Disclosure via HKEX-EPS

Within 30 minutes of the grant, the issuer must file a notification through the HKEX Electronic Disclosure System (HKEX-EPS). The notification must include: the number of options granted, the exercise price, the date of grant, the market price of the shares on the date of grant, and the identity of the grantee if the grantee is a director or chief executive. Failure to file within the prescribed time may result in a trading halt.

The HKEX Listing Rules (Rule 17.07A) require that any grant to a director, chief executive, or substantial shareholder be disclosed in a separate announcement. The announcement must state whether the grant was approved by the independent shareholders and, if not, the reasons for the board’s decision to proceed without such approval.

Annual Report Disclosures

The issuer’s annual report must contain a summary of all share option schemes in operation during the financial year. The summary must include: the number of options outstanding at the beginning and end of the year, the number of options granted, exercised, lapsed, or cancelled during the year, the weighted average exercise price, and the fair value of options granted during the year as determined by an independent valuer.

The SFC’s 2024 Circular on Share Schemes for Listed Issuers (SFC Circular, 15 March 2024) further requires that the annual report disclose the basis for determining the exercise price, including any discounts applied and the rationale for such discounts. The board must also confirm that the grant was made in accordance with the scheme rules and the Listing Rules.

Disclosure to Shareholders in Circulars

If the grant requires shareholder approval—for example, because it exceeds the 10% individual limit or is made to a connected person—the issuer must issue a circular to shareholders at least 21 days before the general meeting. The circular must contain: details of the grantee, the number of options, the exercise price, the basis for determining the price, and a recommendation from the independent board committee.

The circular must also include a valuation report from an independent financial adviser if the grant is to a connected person. The adviser must opine on whether the grant is on normal commercial terms and whether it is fair and reasonable to the shareholders as a whole.

Special Considerations for Cross-Border Issuers and SFC-Regulated Entities

Application of the SFC Code on Takeovers and Mergers

Where a share option scheme is used as part of a change of control transaction—for example, in a scheme of arrangement or a general offer—the SFC’s Code on Takeovers and Mergers (Takeovers Code) may apply. Rule 10 of the Takeovers Code requires that any share option granted within 12 months before an offer be treated as if it were a share issued at the option exercise price, potentially triggering a mandatory general offer obligation.

The SFC has confirmed in its 2023 guidance (SFC Guidance Note on Share Schemes in Takeovers, 12 June 2023) that the grant of options at a discount to market price within the 12-month period preceding an offer will be closely scrutinised. The SFC may require the grant to be unwound or the offer price adjusted.

SFC Licensing Implications for Granting Options to Staff of Regulated Entities

For SFC-licensed corporations (e.g., Type 1 dealers, Type 9 asset managers), granting share options to employees raises licensing considerations. The SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC (SFC Code of Conduct) requires that any remuneration arrangement that could incentivise employees to engage in misconduct must be disclosed and approved by the SFC. Share options that vest upon achievement of sales targets or performance benchmarks may be deemed to create such an incentive.

In 2024, the SFC issued a circular (SFC Circular on Remuneration Practices, 20 November 2024) reminding licensed corporations that share option schemes must not create conflicts of interest or encourage employees to prioritise personal gain over client interests. The SFC may impose conditions on a licence that restrict the use of share options as a form of remuneration.

Hong Kong Monetary Authority (HKMA) Oversight for Authorised Institutions

For authorised institutions (AIs) regulated by the HKMA, share option schemes must comply with the HKMA’s Supervisory Policy Manual (SPM) module on Remuneration Practices (module RM-1). The HKMA requires that variable remuneration, including share options, be subject to malus and clawback provisions. The SPM module, last updated in December 2024, specifies that at least 50% of variable remuneration must be deferred for a period of not less than three years.

The HKMA also requires that the design of any share option scheme for staff of AIs be submitted to the HKMA for prior approval if the scheme involves a discount to market price or if the grant exceeds 0.5% of the AI’s issued shares. This approval must be obtained before the grant is made.

Actionable Takeaways

• Ensure that the exercise price of any share option grant is set at or above the higher of the closing price on the grant date and the five-day average closing price, as required by HKEX Listing Rules Chapter 17.
• File all grant notifications through HKEX-EPS within 30 minutes of the grant, and prepare a separate announcement for any grant to a director, chief executive, or substantial shareholder.
• Obtain independent shareholder approval for any grant that exceeds the 10% individual limit or is made to a connected person, and issue a circular at least 21 days before the general meeting.
• For SFC-licensed corporations, review the share option scheme against the SFC Code of Conduct to ensure it does not create incentives for misconduct, and seek SFC approval if the scheme involves a discount or performance-based vesting.
• For authorised institutions, submit the share option scheme to the HKMA for prior approval if the grant involves a discount or exceeds 0.5% of issued shares, and ensure that at least 50% of variable remuneration is deferred for three years with malus and clawback provisions.

This does not constitute legal advice. Consult a solicitor for your specific case.