The ASX’s latest compliance update provides the most definitive guidance we’ve seen from the ASX on the application of ASX listing rule (LR) 6.23.3.
LR 6.23.3 prohibits changes to options/rights that have the effect of reducing the exercise price, increasing the period for exercise or increasing the number of shares received on exercise. The rule applies to all options issued by a listed entity including employee options/rights. It applies to employee securities even if you don’t need shareholder approval to issue them and it also applies whether the options/rights are settled by delivering newly issued shares or transferring existing shares.
The ASX’s rationale for LR 6.23.3 is that changes to these ‘fundamental features’ (the exercise price, period for exercise and number of shares received on exercise) affect the value of the option/right, so need to be known with certainty. And that they potentially affect the market in the company’s ordinary shares, so should be prohibited to promote market certainty.
In its recent guidance, the ASX says exercising a discretion to waive a performance hurdle, or to make it easier to achieve, is treated by the ASX as increasing the period for exercising the option/right, which is prohibited by LR 6.23.3. In essence, the ASX is making it clear that you look at substance over form. We think this is consistent with how the ASX has approached LR 6.23.3 for some time.
That’s not to say we think all discretions exercised in respect of performance hurdles would be prohibited by LR 6.23.3. Some discretions fall short of, effectively, waiving a performance hurdle or making it easier to achieve which are, in our view, fine. An example is exercising a discretion to remove a delisted entity from a performance hurdle comparator group. Or to adjust for abnormal events, where failing to do so would materially change ‘the deal’ in respect of the options/rights.
The ASX has granted waivers of LR 6.23.3 from time to time without requiring shareholder approval. These have been for minor or administrative amendments. The ASX’s recent guidance doesn’t discuss that practice, nor signal any changes to it, which we hope won’t be the case.
The recent guidance does say the ASX will usually be prepared to grant a waiver for unquoted employee options/rights that would allow a company to seek shareholder approval to make a change that would otherwise be prohibited by LR 6.23.3 provided:
- the options/rights were issued in compliance with the LRs;
- the options/rights represent a relatively small proportion of the company’s undiluted issued capital (5% as the ‘rule of thumb’); and
- granting the waiver won’t undermine prior shareholder approvals or ASX confirmations given under the LRs.
On this last point, the ASX says it will generally not grant a waiver in relation to an option/right that was issued with shareholder approval if the possibility of the change and the circumstances in which the change might occur were not disclosed ‘specifically and prominently’ in the original notice of meeting. That’s difficult, as issues with LR 6.23.3 are usually unexpected. So how companies can foreshadow them is an open question and will need careful thought. It’s not always possible to predict future events – who could’ve predicted COVID would occur and blow many performance hurdles out of the water?
What is clear from the guidance is you can’t get around LR 6.23.3 by simply including in the terms of grant of an option/right (or in any notice of meeting seeking, eg, CEO equity approval) a general power for the Board to amend the terms to change the deal or allowing it to waive the terms of the options/rights. We think LR 6.23 has always prohibited this and the recent guidance clarifies this.
