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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

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:

  • cash-settled performance rights (as they are not “equity securities”);
  • an issue of Performance Securities pursuant to a takeover bid or a merger by way of a scheme of arrangement; or
  • an issue of Performance Securities:
    • under an employee incentive scheme; or
    • as part of a remuneration package of a director or employee, where the issue has been made in the ordinary course of business of the entity, not in connection with a new or re-compliance listing and has been approved by securities holders under Listing Rule 10.11 or 10.14 (as applicable) or by the board or remuneration committee (if Listing Rules 10.11 or 10.14 do not apply).

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:

  • fixed or calculated by reference to a formula that delivers a fixed outcome so that investors and analysts can readily understand, and have reasonable certainty as to, the impact on the entity’s capital structure if the milestone is achieved; and
  • objectively fair and reasonable, both in absolute terms and in relative terms compared to the additional value delivered if the milestone is met.

ASX has listed a number of examples of Performance Securities it will likely deem inappropriate, including:

  • where conversion terms are determined by reference to the market price of the ordinary shares at a future date or over a future period and there is no floor on the conversion price; and
  • where conversion is triggered by introducing new products, investors, customers or users without meaningful financial thresholds around the benefit to be provided.

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:

  • performance milestones tied to revenue or profit for a particular period that do not expressly exclude or disregard one-off or extraordinary revenue items, revenue received in the form of government grants, allowances, rebates or other hand-outs or revenue or profit that has been “manufactured” to achieve the performance milestone;
  • performance milestones tied to a projected financial measure for a particular period rather than an actual financial measure for that period; and
  • performance milestones involving a financial measure that is not audited by the entity’s external auditor or some other quantitative or qualitative measure that is not signed off by another suitable expert.

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:

  • the entity is already listed, it is proposing to issue Performance Securities and the number of ordinary shares into which those Performance Securities will convert in aggregate if the applicable milestone is achieved is greater than 10% of the number of ordinary shares the entity proposes to have on issue at the date the Performance Securities are to be issued; or
  • the entity is applying to be listed, it has or proposes to have Performance Securities on issue at the date of its admission to quotation and the number of ordinary shares into which those Performance Securities will convert in aggregate if the applicable milestone is achieved is greater than 10% of the number of ordinary shares the entity proposes to have on issue at the date of its admission to quotation.

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

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:

  • the price at which the entity’s securities traded on ASX over the last 20 trading days on which the entity’s securities have actually traded on ASX preceding the date of the announcement of the proposed transaction was not less than the offer price; or
  • the entity announces at the same time that it announces the proposed transaction that it intends to consolidate its securities at a specified ratio that will be sufficient, based on the lowest price at which the entity’s securities traded over the 20 trading days referred to previously, to achieve a market value for its securities of not less than the offer price, and
  • the offer price is not less than 2 cents per share.

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.

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