This is a service specifically targeted at the needs of busy non-executive directors. We aim to give you a “heads up” on the things that matter for NEDs in the week ahead – all in two minutes or less.
In this Edition, we consider ASX’s further guidance on performance securities, ASIC’s pilot programs for 2021, the expansion and extension of the SME guarantee scheme, the treatment of option cancellation payments to employees in M&A transactions and the return of global trade in 2021.
GOVERNANCE & REGULATION
Further update to ASX guidance on performance securities. ASX’s Guidance Note 19 Performance Securities was substantially amended in August 2020, notably with the effect of expanding the ambit of “performance securities” and requiring an independent expert’s report in certain circumstances. These amendments have since shifted the thinking of Boards in structuring incentives, performance milestones and deferred scrip consideration. On 12 March 2021, Guidance Note 19 was again amended – predominately to clarify ASX’s position with respect to some of the key 2020 changes including the application of the requirements in Guidance Note 19 to deferred scrip consideration and the interaction with an entity’s Listing Rule 7.1 capacity. ASX also clarifies the circumstances where in-principle advice should be sought in relation to the issue of performance securities, and notes that “arm’s length control transaction securities”, “ordinary course of business acquisition securities” and “ordinary course of business remuneration securities” would not require such in-principle advice. Boards of listed entities will need to carefully note these changes to Guidance Note 19 when considering remuneration and incentive structures and deferred scrip consideration. See ASX’s amendments to Guidance Note 19.
ASIC introduces pilot programs for 2021. Last week’s AFR Business Summit presented an opportunity for market discussion and updates, including from ASIC Deputy Chair, Karen Chester, who introduced ASIC’s pilot programs for 2021. These pilot groups are enforcement – analysing websites and advertising to identify funds that are marketed as lower risk or more liquid than they actually are; product design and distribution – ASIC’s design and distribution obligations for financial services regulation; and superannuation – enforcing recent superannuation reforms. These pilot programs, and ASIC’s role more generally in 2021, are focused on what it identifies as two key harms, being consumer harm and cyber risk. The Deputy Chair flagged that ASIC’s resolve is to transition these pilots to enduring practice and “regulation as usual” over the course of 2021. See ASIC’s media release.
Expansion and extension of the SME guarantee scheme. The Australian government has announced that it will expand and extend the SME guarantee scheme introduced in 2020 as part of the economic response to the COVID-19 pandemic. Under the newly announced SME Recovery Loan Scheme, small and medium sized businesses with up to $250 million turnover that were the recipients of the JobKeeper payment between 4 January 2021 and 28 March 2021 will be eligible for guaranteed loans of up to $5 million over a period of ten years, with an optional repayment holiday period. The Government’s SME Recovery Loan Scheme is designed to support the economic recovery, and to provide continued assistance, to firms currently on JobKeeper. See Treasury’s media release.
Option cancellation payments to employees in M&A transactions are not immediately deductible. Companies that are the targets of M&A activity often make payments to employees to cancel their entitlements under employee share and option schemes. The Federal Court in Clough Limited v Commissioner of Taxation  FCA 108 has ruled that these payments are not deductible to the payer. However, option cancellation payments are not the only way to deal with options and performance rights in an M&A transaction. For example, options and performance rights could simply be allowed to lapse. Alternatively, options and performance rights could be allowed to vest with shares being issued to employees, and those shares then being acquired by the majority shareholder of the relevant company. Another option would be for the majority shareholder of the relevant company to replace the options and performance rights with similar interests. However, each of these alternatives have different tax and commercial outcomes attached to them. Both targets and acquirers should determine which strategy is in the entity and its employees’ best interests. See G+T’s article on this decision.
OVER THE HORIZON
The return of international trade. Last year, when the COVID-19 pandemic first hit, global trade decreased drastically. However, recent trade data indicates that global trade is strongly recovering. China’s trade data for January and February of this year indicates that its exports were 60% higher than exports in January and February of 2020. Similarly, in the US, exports increased by 1.4% to pre-pandemic levels in January 2020. Similar trends are currently being observed on a global level, including in relation to Australian exports.