When it is better not to use board discretion for executive or employee equity plans

Board directors are well aware that investors and proxy advisers expect them to disclose when and how they have used discretion to adjust, or not adjust, executive incentive outcomes.

This is most often the case with STI scorecards and the annual STI award.

While less frequent, boards occasionally also apply discretion to LTI awards. But doing so is subject to a compliance requirement that many directors and management are not aware of.

ASX Listing Rule 6.23 applies to options. The ASX regards share rights, performance rights and other rights to acquire shares as options, for the purpose of LR 6.23.

LR 6.23 specifies rules applying to changes affecting options and rights. Within this, sub-rule 6.23.3 states:

“A change which has the effect of reducing the exercise price, increasing the period for exercise or increasing the number of securities received on exercise cannot be made.” (our emphasis).

This listing rule does not provide an exception (unlike others) for shareholder approval of the change.

The ASX regularly releases Compliance Updates on its views for maintaining market integrity. In Compliance Update 09/23 (the Update) released in December, the ASX reminded issuers and their boards of its views on changes affecting options (including performance rights):

“Any change to a performance hurdle or milestone that makes the hurdle or milestone easier to achieve is an increase in the period for exercising the option that is prohibited by Listing Rule 6.23.3. This is because the option might vest in circumstances where it otherwise would not have vested as a result of the change. ASX will generally assume that any change to a performance hurdle or milestone will make the hurdle or milestone easier to achieve.”

This does not, of itself, mean necessary changes cannot be achieved. The Update goes on to say that:

“While ‘the rules are the rules’ and an entity has no right or expectation to be granted a waiver, ASX is usually prepared to grant waivers permitting entities to seek securityholder approval to make a change that would otherwise be prohibited under Listing Rule 6.23.3 if:

    • the options are not quoted and were issued under an employee incentive scheme or as remuneration;
    • the options were issued in compliance with the Listing Rules;
    • the options represent a relatively small proportion of the entity’s undiluted issued capital …; and
    • granting the waiver will not undermine any prior securityholder approvals or ASX confirmations that have been given for the purposes of the Listing Rules. “

So, the issue for directors when considering a variation of the terms of options or performance rights, is, firstly, applying to the ASX for a waiver of LR 6.23.3. Shareholder approval is a condition of the waiver, and is not a replacement for the waiver.

Some may think that a waiver and shareholder approval are not required if shareholder approval was not previously sought for the options or performance rights that are to be varied. ASX LR 6.23 makes no provision for such exceptions. Same response – a waiver is required to get to “first base”. That is, permission to seek shareholder approval to vary the terms of options or performance rights.

If you are interested in the detail, read Compliance Update 09/23 HERE.

© Guerdon Associates 2024
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