ASX has recently released a new guidance note 19 to assist listed companies and companies seeking to list in structuring the terms of performance shares. Partner, Craig Yeung and Associate, Jarrod Wilksch, review the new guidance.

What are performance shares?

Performance shares are shares that have limited rights unless and until a designated performance milestone is achieved. If the milestone is achieved the performance shares will then convert into a given number of ordinary shares with the usual rights attached.

Why issue performance shares?

ASX notes that performance shares are generally issued in the following three circumstances:

  • To a vendor selling an asset to a company as a form of contingent deferred consideration. This is usually done where the value of the asset being sold is uncertain or may vary significantly, depending on whether the relevant performance milestone is achieved (for example mining tenements which require further drilling and other work to confirm the size and quality of the resource).
  • To the directors, managers or other staff of a company to incentivise them to achieve particular performance milestones.
  • As part of an employee incentive scheme.

Potential Listing Rule issues with performance shares

There are a number of ASX Listing Rules which need to be considered when a company intends to issue performance shares. Most relevantly:

  • The terms that apply to each class of securities in a listed entity must, in ASX’s opinion, be appropriate and equitable.
  • Listed entities have an ongoing obligation to have a structure that is appropriate for a listed entity.

Further, an entity seeking to become listed must have a structure that is appropriate for a listed entity.

Guidance Note 19 (GN 19) provides guidance on the application of these listing rules to the issue of performance shares. It also provides a number of examples of instances where it considers that a listed entity (or entity seeking to list) that issues performance shares will not satisfy these requirements.

Terms of performance shares

GN 19 sets out certain base requirements which it will generally expect all performance shares to satisfy. Examples of these conditions include that the performance shares will not:

  • be transferable (including not being quoted on ASX)
  • carry any voting rights
  • confer rights to dividends
  • confer any right to participate in new issues of shares (such as bonus or entitlement issues),

until the relevant performance milestone is satisfied, at which point the shares will convert into ordinary shares.

ASX also states what it considers to be an inappropriate number of performance shares for a company to have on issue. Broadly, ASX generally will not permit a listed company (or a company seeking to list) to issue a number of performance shares which if converted will be greater (whether alone or together with any options or convertible securities) than the number of ordinary shares in the company on the date of issue.

Appropriate performance milestones

GN 19 states that to meet the requirements under the Listing Rules, the performance milestone attached to a performance share must be appropriate and equitable. The policy considerations that ASX takes into account in considering these questions broadly include:

  • There must be an appropriate link between the milestone and the transaction or purpose for the issue of the performance share.
  • The performance milestones must be clear and objective so investors can have an understanding of and reasonably level of certainty as to when the milestones will be met.
  • The number of ordinary shares into which the performance shares may convert must be fixed or calculated by reference to a formula that delivers a fixed outcome.
  • The performance shares must have a time limit by which the performance milestone must be achieved.

Shareholder Approval and Disclosures

GN clarifies that ASX will generally impose a condition that a listed company obtain shareholder approval before issuing any performance shares.

It also sets out:

  • the disclosures that should be made in the notice of meeting seeking shareholder approval
  • after the performance shares have been issued, the disclosures that should be made if any of the performance milestones are satisfied (or fail to become satisfied by the expiry date) and the consequences of such satisfaction (or non-satisfaction).

Applying for in-principle advice

GN 19 encourages companies proposing to issue performance shares to first consult with ASX and apply for in- principle advice that the terms of the performance shares will satisfy the Listing Rule requirements.

In making the submission, the onus is on the company seeking the in-principle advice to satisfy ASX that the terms of the performance shares should be acceptable to ASX. Accordingly, the application should contain submissions from the company as to why ASX should not object to the terms of the performance shares.