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Limitations on board discretion to waive vesting conditions on options and performance rights

Corporate News - 13 December 2023


Historically, it has been customary for the grant of performance options or performance rights to directors, management and employees (whether under an employee incentive scheme (EIS) or as part of remuneration) that the board retains the right to waive vesting conditions.  This discretion is commonly exercised to enable unvested options or performance rights to vest where a director or employee is a ‘good leaver’ or where the company is the subject of a change of control.

However, ASX has now confirmed, in its latest Compliance Update 09/23, that the exercise of a general board discretion to waive a performance hurdle or milestone before it has been achieved will be viewed by ASX as a breach of Listing Rule 6.23.3 as it increases the period for exercising the option, which is prohibited by Listing Rule 6.23.3. In this context, ASX treats ‘performance rights’ as ‘options’ for the purposes of the rules set out in LR 6.23.3 provided the performance right can be settled by the delivery of a share (whether via a new issue or by transfer of existing shares).
This means that any board discretions contained in an EIS or the terms of performance securities cannot be exercised without an ASX waiver, which may only be granted on the condition that it is subject to shareholder approval, being obtained at the time the discretion is exercised.
ASX has made it clear that it will likely only grant a waiver in these circumstances:

  • the options are not quoted and were issued under an EIS or as remuneration;
  • the options were issued in compliance with the Listing Rules;
  • the options represent a relatively small proportion of the entity’s undiluted issued capital (in the absence of other factors, ASX considers this to be less than 5% of the entity’s undiluted issued capital); and
  • granting the waiver will not undermine any prior security holder approvals or ASX confirmations that have been given for the purposes of the Listing Rules.

ASX has made clear that a general power to amend the terms of an option or of a broad discretion to waive the terms of an option does not permit an entity to make changes that are prohibited by Listing Rule 6.23.3.
ASX has also clarified that a change which has the effect of cancelling an option in consideration for the issue of a new option may also be a change which is prohibited by Listing Rule 6.23.3 where it has the effect of reducing the exercise price, increasing the period for exercise or increasing the number of securities received on exercise. Further, a change that has the effect of cancelling an option in consideration for the grant of a new option will generally only be permitted by ASX if:

  • the cancellation of the original option is not conditional on the issue of the new option, and securityholder approval is obtained under Listing Rule 6.23.2; or
  • the entity obtains a waiver from Listing Rule 6.23.3 and security holders approve the change under Listing Rules 6.23.2 and 6.23.4. 
This is an important issue and we would be happy to discuss this further with any clients looking to grant performance securities to directors, management or employees. Please contact us in our Perth office or Melbourne office for further advice by clicking here.
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