Performance not optional – ASX guidance on waiving performance right hurdles

The ASX listing rules contain certain provisions that (the relevant heading tells us) “apply only to options”. These are at listing rules 6.14 to 6.23A and are relatively prescriptive. In particular, listing rule 6.23 sets out those changes that can be made to the terms of an option with shareholder approval, and those changes that are prohibited. These rules apply to an option whether it is listed or unlisted.

Many entities seek to incentivise management and staff through the issue of performance rights. A performance right is a contractual right (rather than a ‘security’) and so is not an option. ASX Guidance Note 19 (on performance securities) makes this distinction clear.

Notwithstanding this, there was (until recently) an element of ongoing uncertainty about the extent to which these particular listing rules should be applied to performance rights. This has now been addressed by ASX in its recent Compliance Update (09/23).

In that update, ASX states that it considers a performance right to be an option for the purposes of listing rule 6.23 if it can be settled by delivery of a share (irrespective of whether that share is newly issued or transferred). The rationale behind listing rule 6.23 is that the fundamental features of an option (and, by extension, a performance right) will affect both the value of that option and (potentially) the value of that entity’s ordinary shares. Accordingly, both shareholders and the market at large have a right to certainty with regard to an option’s fundamental features – including for the sake of market integrity.

ASX makes clear that any:

• change to a performance hurdle or milestone that makes it easier to achieve; or
• exercise of a discretion to waive a performance hurdle or milestone,

will be taken by ASX to be an increase in the period for exercising the option (or performance right) – and therefore will be prohibited by listing rule 6.23. This will be the case even where the relevant plan rules (under which the option or performance right was issued) have preserved a discretion for the board to make modifications or waive vesting conditions as it sees fit (which is often the case – especially where performance rights are issued as incentives).

ASX indicates that it might “in limited circumstances” be willing to grant a waiver of listing rule 6.23.3 to permit such a change in relation to an unquoted option (or performance right) on condition that the change is first approved by shareholders. The prospects of obtaining such a waiver will increase if the relevant performance rights were issued under an employee incentive scheme (or as remuneration), represent a small proportion of the entity’s undiluted issued capital, and the waiver will not undermine any previous shareholder approval(s) obtained. 

ASX’s guidance is useful – in clarifying a position that ASX has held for some time. It also emphasises the limits of reliance on general discretionary rights within plans – in circumstances where they are used to vary the level of ‘performance’ that the rights were intended to promote.