Chapter 17

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Question:

Where and for how long should documents on display be published online?

How will these documents be removed from the relevant websites after the expiry of the prescribed display period?

Answer:

Issuers should publish documents on display on both the HKEX website (through EPS under the new headline category “Documents on Display”) and the issuer’s website.

For documents that are published to meet transaction disclosure obligations only, issuers are required to publish them for time period prescribed by the Listing Rules (which is the same as what the Listing Rules originally require for physical display of such documents).

For documents that are published to meet ongoing disclosure obligations (e.g. constitutional documents, audited financial information and previous transaction circulars), these should be published on a continuous basis. There is no time limit on the length of time listing documents should remain online. (Note: These documents are already published online on a continuous basis. Issuers will not have to publish them again to meet any transaction disclosure obligations as such obligations will be removed with the changes to the Listing Rules.)

After the expiry of any relevant display period prescribed by the Listing Rules, issuers should remove the documents on display manually from the EPS themselves and can also remove them from their own website. They should not do so before the expiry of the relevant display period. The Exchange will not automatically remove documents of display from EPS after a relevant display period has expired.

FAQ Series N/A, FAQ No. 075-2021
LR reference: Main Board Rules 4.14, 5.01B(1)(b), 5.02B(2)(b), 14.66(10), 14.67A(2)(b)(viii), 14A.70(13), 15A.21(4), 17.02(2), 19.10(5)(e) and (6), 19A.27(4), 19A.50, 19C.10B, 29.09, 29.10, 36.08(3), Appendix 1A paragraph 53, Appendix 1B paragraph 43, Appendix 1C paragraph 54, Appendix 1D paragraph 27, Appendix 1E paragraph 76, Appendix 1F paragraph 66, Appendix 4 paragraph 9(b), Appendix 7H paragraphs 5 and 15, Appendix 24 / GEM Rules 7.18, 8.01B(1)(b), 8.02B(2)(b), 19.66(11), 19.67A(2), 20.68(13), 23.02(2), 24.09(2), (3), (5)(a),(e) and (6), 25.20(4), 25.37, 32.05(3), 35.10, 35.11, Appendix 1A paragraph 52, Appendix 1B paragraph 42, Appendix 1C paragraph 53, Appendix 4 paragraph 9, Appendix 17
Released on 18/6/2021 (Updated on 01/01/2022)

Question:

Main Board Rule 17.03(13)/ GEM Rule 23.03(13) permits adjustments to be made to the exercise price of share options in the event of certain corporate activities. The note to the relevant Rule requires that any adjustments must give a participant the same proportion of the equity capital as that to which that person was previously entitled, but no such adjustments may be made to the extent that a share would be issued at less than its nominal value (if any).

How should an issuer calculate the adjustments in the event of (i) a capitalisation or bonus issue, (ii) rights issue or open offer, or (iii) subdivision or consolidation of shares?

Answer:

The overriding principle is that no adjustments to the exercise price or number of shares should be made to the advantage of scheme participants without specific prior shareholders’ approval.

Please see Attachment for further guidance and examples on how adjustments are calculated in the event of the corporate activities.

(Note: This FAQ reflects guidance set out in the Exchange’s letter to issuers of 5 September 2005 (withdrawn).)

FAQ Series N/A, FAQ No. 072-2020
LR reference: Main Board Rules 17.03(13) / GEM Rules 23.03(13)
Released on 6/11/2020

Question:

For an announcement published pursuant to Main Board Rule 17.06A (GEM Rule 23.06A) regarding the granting of an option under a share option scheme, which headline category should a listed issuer use when submitting the announcement for publication?

Answer:

The listed issuer should choose the Tier 2 headline category "Share Option Scheme" under the heading "Securities/Share Capital" under the Tier 1 headline category "Headline Categories for Announcements and Notices".

FAQ Series 8, FAQ No. 8
LR reference: Main Board Rules 2.07C(3), 17.06A / GEM Rules 16.18(2), 23.06A
Released on 28/11/2008

Question:

Should the announcement be made when a share option is granted or when it is accepted?

Answer:

Main Board Rule 17.06A (GEM Rule 23.06A) requires an issuer to publish an announcement as soon as possible upon the granting of an option under a share option scheme. Under Main Board Rule 17.01(3) (GEM Rule 23.01(3)), "grant" is defined to include "offer". The issuer should therefore publish its announcement as soon as possible upon the offer of the option, whether or not it has been accepted. The intention of new Rule 17.06A is to minimise opportunities to backdate share option awards.

FAQ Series 8, FAQ No. 49 Issue 8
LR reference: Main Board Rules 17.06A / GEM Rules 23.06A
Released on 28/11/2008 (Updated on 13/3/2009)

Attachment
SUPPLEMENTARY GUIDANCE ON MAIN BOARD LISTING RULE 17.03(13)/GEM LISTING RULE 23.03(13) AND THE NOTE IMMEDIATELY AFTER THE RULE
Main Board Listing Rule 17.03(13)/GEM Listing Rule 23.03(13) and the Note
 
17.03
      /23.03   
The scheme document must include the following provisions and/or provisions as to the following (as the case may be): ……
 
  (13) a provision for adjustment of the exercise price or the number of securities subject to options already granted and to the scheme in the event of a capitalisation issue, rights issue, sub-division or consolidation of shares or reduction of capital.

Note: Any adjustments required under rule 17.03(13)[/rule 23.03(13)] must give a participant the same proportion of the equity capital as that person was previously entitled, but no such adjustment may be made to the extent that a share would be issued at less than its nominal value (if any). The issue of securities as consideration in a transaction may not be regarded as a circumstance requiring adjustment…..”.
 
Issue

Concerns have been raised that the wording of the Note appears to be ambiguous. We are also aware of a small number of cases where adjustments have been made that are to the advantage of scheme participants contravening the Listing Rule requirements. The following example illustrates how adjustments have typically been made for a rights issue:

Existing shares in issue: 100m
Shares under option: 10m (10% of the existing share capital)
Existing market price: $1.00
Existing exercise price of options: $1.00 per share
Existing market capitalisation: $100m
Total exercise price of options: $10m
Rights issue price: $0.50
Issue ratio: 4 new shares for each share held

Results:
Enlarged market capitalisation: $300m
Enlarged shares in issue: 500m
Theoretical ex-rights price: $0.60 (being (1 x $1 + 4 x $0.50) / 5)

Literal interpretation of the Note:
If the Note is taken literally, then the option holders would be entitled to the same proportion of the enlarged equity capital, that is, 50m shares. Since the aggregate money payable on subscription ($10m) should be unchanged, this implies that the exercise price will be cut to $0.20 per share. As such, each of the 50m options has an Intrinsic Value1 of $0.40, being the theoretical ex-rights price less the revised exercise price of the option, and is instantly worth $20m in total. Before the rights issue, the options did not have any Intrinsic Value as the market price was the same as the exercise price. Therefore the adjustment is not correct.

Please see below for the correct adjustment.

Interpretation
The overriding principle is that no adjustments to the exercise price or number of shares should be made to the advantage of scheme participants without specific prior shareholders’ approval. The adjustment should have a neutral impact or worse from the perspective of the scheme participants. Another way of looking at this is that no adjustments should be made that would increase the aggregate Intrinsic Value1 of the outstanding options.

The Scheme Rules adopted by issuers and approved by shareholders, and the circular that is sent to shareholders, describe how any adjustment mechanism will work. In practice issuers seldom describe in detail in any circular how any adjustment mechanism would work. The circular normally simply includes the provision for adjustment and states the circumstances for adjustment as required under MB Rule 17.03(13) / GEM Rule 23.03(13).

Correct adjustment
A straightforward proportionate adjustment should be made for a capitalisation issue, sub-division, consolidation or reduction in share capital. Generally, adjustments should also be made for transactions where there is a price-dilutive element eg a rights issue or open offer. (Although MB Rule 17.03(13) / GEM Rule 23.03(13) does not cover an open offer, the Exchange considers that an open offer should be subject to the requirement of such rule if there is a price-dilutive element). That adjustment should be based on a scrip factor similar to the one used in accounting standards in adjusting the earnings per share figures, to account for the bonus or price-dilutive element embedded in a rights issue (see Hong Kong Accounting Standards 33, Appendix A). No adjustment should be made for an issue made at full consideration unless it also involves a capitalisation issue.

The correct formula for an issue of securities with a price-dilutive element, such as a rights issue, open offer or capitalisation issue, would be to multiply the number of shares subject to options by the scrip factor (F), and divide the exercise price by the scrip factor, where:

F=CUM/TEEP

CUM = closing price as shown in Daily Quotation Sheet of the Exchange on the last trading day before going ex-entitlement to the offer (the cum-rights price)

TEEP = Theoretical Ex-Entitlement Price (based on offer ratio, offer price, and CUM)

In the above example, F is 1.667 (being $1/$0.60). Therefore the adjusted number of options is 16.667m (10m multiplied by 1.667). The adjusted exercise price is $0.60 ($1 divided by 1.667). The total exercise monies would still be the same as before, $10m, and the Intrinsic Value would also be the same as before (nil).

Set out in the appendix are examples for calculating the permitted adjustment to the exercise price of outstanding options for a capitalisation or bonus issue, rights issue or open offer and sub-division or consolidation of shares.

APPENDIX TO SUPPLEMENTARY GUIDANCE ON MAIN BOARD LISTING RULE 17.03(13)/GEM LISTING RULE 23.03(13) AND THE NOTE IMMEDIATELY AFTER THE RULE

Adjustments for Capitalisation or Bonus issue, Rights issue or Open offer, and Sub-Division or Consolidation of shares:
 
A Capitalisation or Bonus Issue and Rights Issue or Open Offer of Shares
Adjustments follow the formula :
New number of Options = Existing Options x F

Where

CUM = Closing price as shown in the Daily Quotation Sheet of the Exchange on the last day of trading before going Ex-Entitlement

M = Entitlement per existing Share
R = Subscription Price
 
(a)    Capitalisation or Bonus Issues
Example:
Existing shares in issue : 100m
Shares under Option : 10m (10% of the existing share capital)
Existing market price of the Shares : $1.00
Existing Exercise Price of the Option : $1.00 per Share
Bonus issue ratio: 1 new Share for every ten Shares held

ie. CUM = $1.00, R = $0 and M = 0.1

Therefore,

Adjusted number of Options = Existing number of Options x F = 10m x 1.1 = 11m
(Additional 1m Options will be allocated to the existing holder of Options in the proportion of 1 new Option for every 10 Options held by an Optionholder.)

Intrinsic Value of Options immediately before the Bonus Issue = 10m x ($1.00 - $1.00) = Zero
Intrinsic Value of Options immediately after the Bonus Issue = 11m x ($0.909 - $0.909) = Zero

The purpose of these adjustments is to ensure that, as far as possible, the intrinsic value of the Options remains unchanged before and after the corporate action.
 
(b) Rights Issue or Open Offer
Example:
Existing shares in issue : 100m
Shares under Option : 10m (10% of the existing share capital)
Existing market price of the Shares : $1.00
Existing Exercise Price of the Option : $1.00 per Share
Rights issue (or open offer) price : $0.50
Rights issue (or open offer) ratio : 4 new Shares for each Share held

ie. CUM = $1.00, R =$0.50 and M = 4

Therefore,

Adjusted number of Options = Existing number of Options x F = 10m x 5/3 = 16.67m

(Additional 6.67m Options will be allocated to the existing holders of Options in the proportion of 2 new Options for every 3 Options held by an Optionholder.)

Intrinsic Value of Options immediately before the Rights Issue (or open offer) = 10m x ($1.00 - $1.00)= Zero
Intrinsic Value of Options immediately after the Rights Issue (or open offer) = 16.67m x ($0.60 - $0.60)= Zero
 
B Subdivision or Consolidation of Shares
Adjustments follow the formula:
New number of Options = Existing Options x F

Where F = Subdivision or Consolidation Factor
 
 
(a) Share Sub-division
Example:
Existing shares in issue : 100m
Shares under Option : 10m (10% of the existing share capital)
Existing market price of the Shares : $1.00
Existing Exercise Price of the Option : $1.00 per Share
Share Subdivision: subdivide 1 old Share into 5 new Shares

ie. SF = 5

Therefore,
Adjusted number of Options = Existing number of Options x F = 10m x 5 = 50m
(Additional 40m Options will be allocated to the existing holder of Options in the proportion of 4 new Options for each Option held by an Optionholder.)

Intrinsic Value of the Option immediately before the Share Subdivision = 10m x ($1.00-$1.00) = Zero
Intrinsic Value of the Option immediately after the Share Subdivision = 50m x($0.20-$0.20) = Zero
 
(b) Share Consolidation
Example:
Existing shares in issue : 100m
Shares under Option : 10m (10% of the existing share capital)
Existing market price of the Shares : $1.00
Existing Exercise Price of the Option : $1.00 per Share
Share Consolidation: consolidate 5 old Shares into 1 new Share

ie. SF = 1/5

Therefore,

Adjusted number of Options = Existing number of Options x F = 10m x 1/5 = 2m
(The new 2m Options will be allocated to the existing holder of Options in the proportion of 1 new Option for every 5 old Options held by an Optionholder.)

Intrinsic Value of the Option immediately before the Share Consolidation = 10m x ($1.00 - $1.00) = Zero
Intrinsic Value of the Option immediately after the Share Consolidation = 2m x ($5 - $5) = Zero
 

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1The Intrinsic Value is the difference between the market price (or theoretical ex-entitlement price) of shares under option and the exercise price (or revised exercise price) of the option.