Revised ASX Guidance on Performance Securities and Significant Changes to Activities
Corporate News - 09 September 2020
The ASX has recently released amendments to Guidance Notes 3, 4, 12 and 19. Of particular importance to a number of listed entities are the revisions to Guidance Note 12: Significant Changes to Activities (GN12) and Guidance Note 19: Performance Securities (GN19).
GN19: Performance Securities |
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Types of performance securities |
Performance securities include performance shares, performance options and performance rights, as well as certain contingent consideration agreements and deferred consideration agreements (together, Performance Securities). However, the following Performance Securities do not need to comply with the substantive provisions of GN19:
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In-principle advice needed for performance securities |
ASX has made it clear that any entities undertaking a new or re-compliance listing seek in-principle advice that the terms of any Performance Securities issued (or proposed to be issued) satisfy Listing Rule 1.1 condition 1 as well as Listing Rules 6.1 and 12.5 prior to making any announcements in respect of the Performance Securities. ASX has also substantially expanded the required information which must be included in seeking the in-principle advice. The key requirement is that the entity will need to explain in each case how the entity determined the number of securities and how that number is considered to be appropriate and equitable. |
Determining whether the terms of the performance shares are “appropriate and equitable” |
The terms of Performance Securities need to be “appropriate and equitable” under Listing Rule 6.1. In determining this in the context of Performance Securities, the ASX will look at whether the number of Performance Securities and the performance milestones are appropriate and equitable. In new guidance, ASX has stated that for the number of Performance Securities to be considered appropriate and equitable, the number of ordinary shares into which the Performance Securities will convert if the relevant milestone is achieved must be:
ASX has listed a number of examples of Performance Securities it will likely deem inappropriate, including:
Whilst the criteria ASX will consider when determining whether a performance milestone is appropriate and equitable has not been amended, ASX has provided significant additional clarification on the types of milestones it would deem inappropriate. Importantly, ASX has stated that it will likely deem the following as inappropriate:
ASX has also clarified that whilst the expiry date of a performance milestone should not exceed 5 years, ASX may also reject Performance Securities that expire in less than 5 years if the term ought reasonably be capable of being met in a shorter timeframe. |
Requirement for an independent expert’s report |
ASX has introduced a requirement for an independent expert to opine on whether the issue of Performance Securities in question is fair and reasonable to non-participating security holders where:
ASX expects the expert to assume that the relevant performance milestones have been met and assess the impact that would have on the value of the entity and then determine whether the resulting number of ordinary shares to be issued is fair and reasonable. For listed entities, the expert’s report will need to be included in or accompany the notice of meeting seeking security holder approval to the issue of the Performance Securities. Entities seeking to list will need to include the expert’s report in its prospectus. This deviates from our recent experience, which was that ASX would simply refuse to permit a listed entity to have that number of Performance Securities on issue. |
Change of control requirement |
Previously the number of Performance Securities which could convert on a change of control (notwithstanding that the milestone had not been achieved) was limited to 10% of the ordinary share capital. This constraint has now been removed. Note however that that the change of control must be triggered at more than 50%. |
GN12: Significant Changes to Activities |
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Minimum spread |
ASX indicates that in any re-compliance transaction, only shareholders who participate in the capital raising for at least $2,000 will be counted toward satisfaction of the shareholder spread condition (i.e. existing shareholders with parcels of shares worth $2,000 will not count to spread, unless they subscribe for $2,000 worth of shares under the capital raising). |
Additional conditions for 2-cent waiver |
ASX has modified the conditions which apply to entities seeking the 2-cent waiver to the 20 cent rule. The following conditions must be met:
In addition, the entity must not have undergone a deed of company arrangement or a creditors’ scheme of arrangement in the two years preceding the date of the announcement of the proposed transaction and been continuously suspended since the deed or scheme was effectuated. |
For further advice in relation to any of the issues raised in this article, please contact us in our Perth office on +61 8 9321 4000 or our Melbourne office on +61 3 9111 9400.