We continue to receive a number of enquiries about the circumstances in which the ASX permits companies to issue performance related securities, and the quantum of such securities that have been deemed acceptable by ASX. There has been a general increase in the usage of performance related securities as consideration or to incentivise directors and management of ASX listed companies in recent years.
 
Performance related securities are securities with a right to receive shares upon the achievement of a pre-determined milestone and subject to other terms and conditions, including an expiry date.
 
ASX has a Guidance Note, Guidance Note 19 – Performance Shares that outlines its policy and position on the use of performance shares. The Guidance Note was last updated on 1 December 2019. For clarity, the ASX now treat performance rights in the same manner as they have treated performance shares under the ASX Listing Rules and they do not allow companies to change the name of their performance related securities as a means of avoiding ASX Rules or policy. This is particularly the case where performance rights (as opposed to performance shares) are used for deferred vendor consideration.
 
Notwithstanding that the Guidance Note was only recently updated, the ASX have indicated that they are considering an update to that Guidance Note to take into account the ongoing development of practices that are inconsistent with the principles of the Listing Rules. Where this occurs, there is naturally a lag in the formulation of ASX policy and the publishing of that policy.
 
However, based on our recent experiences and understanding of the ASX’s existing policies in relation to performance related securities, which we expect to be part of any revision to Guidance Note 19, we advise clients considering issuing performance related securities to exercise caution and, to avoid issues with the ASX, consider ensuring that any issues of performance related securities comply with the following principles (in particular where your transactions is an IPO or backdoor listing):
 

1. Performance related securities should have a milestone that is genuine and is objectively verifiable, preferably by an independent third party (usually an auditor or equivalent).
2. ASX has tended to refuse the usage of performance milestones linked to share price, in particular where those performance related securities are issued to vendors or ‘facilitators’ of transactions. If your performance related securities are likely to have a share price hurdle, we recommend early liaison with the ASX.
3. The milestone and the verification of the milestone must be determined prior to the expiry date of the performance security (ie the third party verification that the milestone has been achieved needs to have occurred before the expiry date of the performance related security).
4. Directors should consider governance issues when contemplating issuing performance related securities to promoters or facilitators. ASX has expressed concerns around the use of performance related securities to incentivise promoters where those promoters have no role in the achievement of the performance of the milestones. This is particularly so where the quantum issued or on issue as a percentage of total issued capital is above a reasonable percentage. Where ASX have concerns, they have in the recent past rejected proposed transactions on the basis of the number of performance related securities being issued.
5. Performance related securities can be issued to vendors of a business where the performance milestone relates to the performance of the business or asset being acquired. It should not be possible for performance milestones issued to acquire a business or asset to be deemed achieved by factors unrelated to that new business or asset. By way of example, a revenue related milestone will need to be sales revenue from that business NOT other businesses operated by the entity. Similarly, JORC related milestones should be linked to the asset being acquired. Things like grants received or other one-off revenues should not be able to be considered for the achievement of the performance milestone.
6. In relation to JORC related milestones for mining and exploration assets, milestones should specify the mineral or minerals relevant to the exploration milestone and the specifics of cut-off grades for the purpose of determining the achievement of the set milestone.
7. When determining how many performance related securities should be issued to directors or management, there is no set guidance provided by ASX. However we have seen recent examples where a figure equal to not more than 10% of the fully diluted capital of the company has been accepted by the ASX, and amounts above that figure have been rejected. We therefore consider 10% to be an appropriate guide when determining the maximum number of performance related securities to have on issue in these circumstances.
8. Performance related securities should not have a term longer than 5 years from their date of issue.

 
In addition to the above, we note that companies looking to list on ASX that have been deemed to have a capital structure with too many performance related securities on issue have had their in-principle applications rejected. Where an application is consistently rejected on these grounds, there are risks to the parties involved in relation to their future transactions with the ASX and it is not unreasonable to suggest you would expect greater scrutiny of future transactions in these instances.
 
These guidelines are based on our experiences and discussions with the ASX, and we consider provide the safest path to navigating a transaction using performance related securities through ASX. If you have terms or circumstances that may be outside of these guidelines, we would always recommend engaging with ASX at the earliest opportunity.
 
As always, we remain committed to assist clients with their understanding of the ASX Listing Rules and policies, and if we can assist you in any of these matters, please contact one of the Partners in our Perth office on +61 8 9321 4000 or our Melbourne office on +61 3 9111 9400.