Shareholder approval for director equity grants

While ASX Listing Rule (ASX LR) 10.14 requires companies to seek shareholder approval for equity grants to directors that will be satisfied by the issue of shares, it is an increasing practice for ASX 300 companies to seek shareholder approval for director equity grants even if they will be satisfied by purchasing on-market. This practice is increasing in response to institutional investor and proxy advisor guidelines that require companies to seek approval.

When shareholder approval is being sought ASX LR 10.15 requires the Notice of Meeting resolution to detail a whole range of matters in respect of the grant.

It is not unusual but still minority practice for company boards to seek shareholder approval for director equity grants for the current year and the following two years.

Here is a pros and cons checklist if consideration is being given to seeking pre-approval for 3 years of director equity grants.

Pros for pre-approval

  • Provides shareholders with a clear view of the board’s strategy for the next three years
  • Administratively more efficient in having three years of approval locked down in one AGM
  • Management has clear view of board and shareholder expectations for next three years

Cons for pre-approval

  • It limits the Board’s flexibility to address changing circumstances. If market conditions change to such a level that the pre-approved grants are unrealistic, there is much to be done in the way of disclosure and engagement to readdress the circumstances.
  • Investors and proxy advisers are more reluctant to approve forward grants when full details of the performance requirements and the future market conditions are unknown. Companies therefore need to lock down future performance measures without knowing what market conditions will be like in next two years. The default may well be a floor in the performance metrics that subsequently becomes unreasonable.
  • It can have a significantly demotivating effect for management as they go forward if the pre-approved LTI grants do not reflect the prevailing market and company conditions.
  • In a market with significant level of corporate transactions, the shareholder approved future grants may become a difficult negotiating chip for the board.

There are pros and cons for this approach but, on balance, it could limit the board’s ability to adequately respond in changing times.

© Guerdon Associates 2024
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