The ASX has effectively outlawed the use of board discretion to waive or reduce vesting conditions for options and performance rights, which captures virtually all equity used as part of remuneration. This represents an onerous intrusion by the ASX in the governance of executive remuneration.
GRG Remuneration Insight 177
29 May 2025
ALERT: Since publication, GRG has since spoken directly with the ASX to clarify the intention of ASX Compliance Update no. 09/23.
The ASX confirmed that their aim was not to change market practice or expand the scope of the Listing Rules. Rather, the compliance update is designed to provide clearer guidance on when and how waivers can be obtained in relation to changes to rights and option terms.Importantly, this clarification included guidance on documentation disclosure (i.e. Plan Rules & invitations), and important disclosure considerations when seeking shareholder approvals for equity grants to directors — helping organisations avoid the need to seek waivers or further shareholder approval.
If you would like more information or assistance reviewing your documentation and disclosures, please reach out to your GRG consultant.
“Positive Vesting Discretion Now Locked Behind Two Approvals ASX Compliance Update no. 09/23” has effectively outlawed the use of board discretion to waive or reduce vesting conditions for options and performance rights (Equity Units), which captures virtually all equity used as part of remuneration. This represents a major intrusion by the ASX in the governance of executive remuneration, at least on “positive discretion” for equity. It seeks to require shareholder approval of proposed uses of board discretion to increase vesting of Equity Units but only after the ASX has provided a waiver to then seek such shareholder approval. This applies irrespective of whether the original grant was approved by shareholders (required for directors) or not approved by shareholders (all other employees). Thus, it is more onerous than current shareholder approval processes related to Equity Units and covers more participants. It also applies retrospectively in that it covers situations where the board discretion is intended to be applied, irrespective of when the options or performance rights were granted. This Insight outlines the Update and discusses aspects that listed companies need to consider.
Overview of ASX Compliance Update
This Update covers the application of ASX Listing Rules 6.23.2, 6.23.3 and 6.23.4 which deal with options. The key features of the Update include:
- For purposes of these Rules the ASX considers a performance right to be an option if the right may be settled in the company’s shares. Thus, it includes rights that are considered to be derivatives for Corporations Act purposes as well as share rights.
- It prohibits the board from exercising discretion to waive or reduce performance or milestone vesting conditions to increase vesting. It appears that this is not intended to stop the board from exercising its discretion to reduce vesting.
- That any grant of Equity Units that included board discretion as part of the terms does not allow the board to exercise that discretion, even if the terms were approved by shareholders, unless the ASX has granted relief (waiver) to seek shareholder approval to exercise that discretion (whether or not previously approved by shareholders).
- In relation to unquoted Equity Units, the ASX may provide a waiver to seek shareholder approval for the intended exercise of board discretion, if certain conditions are satisfied.
- Granting a new option as consideration for the cancellation of an existing option is prohibited unless prior shareholder approval has been obtained.
Circumstances when Board Discretion May be Relevant
Changing Circumstances During the Vesting Period
A commonly observed clause in plan rules for Equity Unit plans, used for remuneration purposes, is for the board to have discretion to bring forward vesting or change the level of vesting at the end of the vesting period. Such provisions were inserted to recognise that many unexpected events may occur prior to vesting and that to achieve a fair and reasonable level of vesting the board needs to be able to intercede to change the timing of or increase vesting. While exercising discretion to reduce vesting (“negative discretion”) is acceptable and does not require a waiver or shareholder approval, “positive discretion” to increase vesting or accelerate vesting will require two-step approvals for all employees. However, it is often necessary to truncate, re-set or override plan terms when the unexpected arises such as in the case of a major sale of business assets, return of capital to shareholders, or when key projects are scrapped due to regulatory issues.
Discretion in Termination of Employment Scenarios
A commonly observed rule in Equity plans used for remuneration purposes, is for the board to have discretion to decide the level of vesting, if any, when the vesting period has not been completed at the time of a termination of employment. Given that performance targets, milestones and service periods will not have been fulfilled at the time of the termination of employment a prudent approach has long been to apply board discretion. Many companies have avoided such discretions so as to avoid the possibility of exceeding retirement benefits limits under the Corporations Act. Nevertheless, insertion of board discretion was designed to enable a fair and reasonable level of vesting to be delivered to employees in the relevant circumstances. While GRG advocates leaving equity on-foot, many boards continue to see this as a key governance control for negotiating the early exit of employees and fair treatment of “good leavers”.
Change of Control: Impact on Vesting and Executive Equity
When a change of control occurs, boards are usually provided with discretion under plan rules because previous performance hurdles and milestones can become irrelevant due to the company’s ownership changing or the previous business plans being replaced with new ones.
Of course, if the change of control will result in a delisting of the company, then the ASX Listing Rules will become irrelevant, and boards will have freedom to act and apply its discretion unless the board feels obliged to comply with the Listing Rules prior to the actual date of the delisting. Many Key Management Personnel (KMP) find it necessary to do this as the incoming board may be hostile towards executives following the takeover i.e., fair treatment is not expected following delisting. Again, insertion of board discretion was designed to enable a fair and reasonable level of vesting to be delivered to employees in the relevant circumstances.
Why the ASX and Shareholder Approval Process is Problematic
Although the Update does provide a way forward involving ASX waivers and shareholder approvals, it is expected that this alternative will not be appealing to many companies. For example, if the approval relates to former employees, it is anticipated that shareholders may be less inclined to be supportive than they would be for continuing employees.
Even when the discretion relates to ongoing employees, many boards are likely to see the process of ASX approval and shareholder approval as being too onerous, noting that timing will likely present a challenge given that approvals will generally only be able to be sought at general meetings. Often such discretion is time-sensitive forcing boards to choose between high-cost Extraordinary General Meeting (EGM) arrangements or waiting until the next regular meeting of shareholders.
Future Grants of Equity Units
For future grants of Equity, those companies with plan rules that include board discretion on termination of employment, sale of assets, return of capital or a change of control should review the alternatives available with a view to converting the board discretion into a specified level of vesting that is triggered by the relevant event. These situations are very different from each other and therefore would warrant different approaches specifying the level of vesting that will be triggered. However, it is not currently clear whether specified levels of vesting will overcome the prohibition on waiving vesting conditions. GRG has written to the ASX to clarify this aspect and will provide an update to this article online if clarification is provided.
Broad discretion clauses could be retained but with the understanding that they will be unlikely to be used other than to reduce vesting.
Make Good Grants
Make good grants of Equity Units could be made when vesting falls short of what the board considers reasonable in the relevant circumstances. Such grants would generally not be subject to vesting conditions. If such grants were to be made to employees who are not directors, then they may be made in a timely manner without shareholder approval. However, for directors the “make good grants” (to replace what would otherwise have vested under discretion) will need to be submitted to shareholders for approval but would not be subject to ASX waiver requirements under the Update.
Of course, make good grants should not be made as consideration for cancelling other Equity Units as that would contravene ASX Listing Rule 23.3.2, unless shareholder approval for the grant is obtained.
Make good grants seem to be the only way forward in relation to cases where positive discretion is appropriate and timing or other considerations make seeking ASX waiver and shareholder approval impractical.
Time to Review and Update Equity Plans
Most short and long term plans will need to be revised to comply with these changes and boards may need to consider whether they have appropriate structures available to offer make-good grants (e.g. Restricted Rights with no vesting conditions). Need assistance revising your equity incentive plans in light of ASX changes? Contact GRG for tailored support.
