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ASX rule changes “uncommercial”

Corporate and M&A
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Corporate and M&A partners Jason van Grieken and Gavin Hammerschlag argue in today’s AFR that new ASX rules around performance securities could leave shareholders more, rather than less, exposed to ongoing commercial volatility.

In a jointly authored opinion article, Jason and Gavin explain that amended guidance, issued by the ASX in August, make it more complex, time consuming and costly for boards to utilise earn-out clauses and contingent consideration arrangements settled through a share issue deal - mechanisms commonly employed in M&A transactions to protect and benefit shareholders. Where earlier guidance only applied to a particular class of shares, which had limited rights unless and until performance milestones were achieved, the new version encompasses any form of contractual earn-out or other performance-based payment mechanisms settled through shares.

“Access to scrip is one of the benefits of being listed, reflecting the reality that business performance shifts over time,” they write. “Scrip-based earn-outs and contingent consideration arrangements are a tried and tested mechanism for protecting shareholders by making sure the full purchase price flows only if post-transaction performance lives up to pre-transaction expectations. In doing so, they also serve to better align the interests of purchaser and vendor.

“In amending its guidance note, the ASX has ignored the first point and, while giving a nod to the second, the exchange has effectively rendered this sensible, well-regulated risk mitigation mechanism uncommercial.”

Jason and Gavin was assisted in writing the article by lawyer Max Grunwald.

To read the full article, click here. To read the online AFR version, click here.

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