On 12 March 2021, the Australian Securities Exchange (ASX) released an updated version of Guidance Note 19 Performance Securities (GN19).
A “performance security” is a security that converts, or may convert, into one or more ordinary shares if and when a certain performance milestone is achieved (but has limited rights until conversion). The most common forms of performance securities are performance shares, performance options and performance rights.
Performance securities often raise issues under the ASX Listing Rules, so ASX has published GN19 to assist listed entities, or entities applying to be listed, to understand how ASX applies the ASX Listing Rules to performance securities.
A summary of the key recent changes to GN19 is set out below.
Agreements to issue or transfer ordinary shares in the future
The updates to GN19 confirm that an agreement by an entity to issue or transfer ordinary shares in the future if a certain performance milestone is achieved is treated by ASX as if it were a performance security for the purposes of GN19 (even if the agreement does not contain the usual hallmarks of a traditional security). Accordingly, rights to receive ordinary shares under an agreement, such as a right to receive “future consideration”, “contingent consideration” or “deferred consideration”, must comply with GN19.
The updated version of GN19 confirms that ASX does not require a listed entity to apply for in-principle advice about the potential application of the ASX Listing Rules to the issue of performance securities by a listed entity where:
- the terms attaching to the performance securities conform to GN19 and have been approved by the board or a committee of the board; and
- the issue is:
- arm’s length control transaction securities: pursuant to a takeover bid or a merger by way of scheme of arrangement that is not being undertaken in connection with a re-compliance listing;
- ordinary course of business remuneration securities: a part of the remuneration package of a director or employee or under an employee incentive scheme, where the issue is not being made in connection with a re-compliance listing; or
- ordinary course of business acquisition securities: under an agreement to acquire an undertaking, where the agreement has not been entered into in connection with a re-compliance listing and the issue is, or part of, the consideration for the acquisition of the undertaking.
ASX recommends that an entity proposing to issue performance securities other than in the circumstances set out above apply to ASX for in-principle advice that the performance securities will comply with the ASX Listing Rules.
Independent Expert’s Report
The updated version of GN19 also clarifies when ASX will require an entity to obtain an independent expert’s report for the purposes of seeking shareholder approval for a proposed issue of performance securities.
ASX does not require an independent expert’s report for an issue of arm’s length control transaction securities, ordinary course of business remuneration securities or ordinary course of business acquisition securities.
However, the requirement for an independent expert’s report will apply in the following two situations:
- where the entity is already listed, it is proposing to issue performance securities that:
- are not arm’s length control transaction securities, ordinary course of business remuneration securities or ordinary course of business acquisition 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 proposed issue date for the performance securities; or
- where the entity is applying to be listed:
- it has or proposes to have performance securities on issue at its admission date; 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 its admission date.
In the case of listed entities, the report must opine on whether the proposed issue of the performance securities is fair and reasonable to non-participating security holders. In the case of entities applying to be listed, the report must opine on whether the performance securities the entity proposes to have on issue at its admission date are fair and reasonable to non-participating security holders.
In both cases, in determining its opinion on fairness and reasonableness, ASX would expect the independent expert to assume that the relevant performance milestone(s) has been met, assess the impact that would have on the value of the entity compared to the situation if the relevant performance milestone(s) was not met, and then determine whether the resulting number of ordinary shares to be issued by the entity to the holder of the performance shares is fair and reasonable in the circumstances.
The recent changes to GN19 are a reminder that the appropriateness and equitableness of performance securities are a key focus for ASX. Accordingly, it is important that the boards of listed entities or entities applying to be listed properly consider the impact of GN19 on any performance securities or contingent scrip consideration.
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