29 Aug 2013
On-market share purchases for directors: ASX acts
by Karen Evans-Cullen, David Landy, Rod Halstead
Apart from the anonymous information about the number and price of shares bought, the rule will have only a limited effect on disclosure about the circumstances of individuals.
Companies will have to disclose some details of share purchases for their employees and directors, under a new ASX proposal.
This is ASX's response to concerns that some listed companies were not disclosing enough details of such purchases to their shareholders or the market.
The issue first emerged in a report by proxy adviser Ownership Matters published earlier this year. Ownership Matters claimed that the practice took two forms:
- the on-market buying of shares for employees and directors whose equity incentives were vesting;
- the on-market buying of shares, through a trust, for employees and directors whose incentives had still to vest.
The alleged vice of this practice was that it overstated cash flow and, in the case of share purchases for unvested incentives, allowed companies to pay dividends on those unvested shares.
The Listing Rules currently prevent listed entities from allowing directors to acquire shares under an incentive scheme without shareholder approval. They do not apply to on-market purchases under an employee incentive scheme that provides for the purchase of shares by or on behalf of employees or directors.
ASX has taken – and continues to take – the view that these purchases should not necessarily require shareholder approval.
Nevertheless, it has responded to Ownership Matters' report (and the resultant media stories) by proposing that there should be greater disclosure of the practice. A new draft Listing Rule 3.19B, to come into effect from 1 January next year, will require the disclosure, within five business days, of some on-market purchases under schemes that provide for the purchase of securities by or on behalf of employees. or directors or their related parties.
The precise terms of the new rule are:
"If an entity, a child entity, or anyone else to whom the entity or a child entity has directly or indirectly provided funds for that purpose, purchases securities on-market under the terms of a scheme that provides for the purchase of securities by or on behalf of employees or directors, the entity must give ASX the following information no more than 5 business days after the purchase:
3.19B.1 The total number of securities purchased.
3.19B.2 The average price per security at which the securities were purchased.
3.19B.3 If all or any of the securities were purchased on behalf of a director or a related party of a director:
the name of the director;
if they were purchased on behalf of a related party of a director, the name of the related party;
the number of securities purchased on behalf of the director or related party; and
the average price per security at which the securities were purchased on behalf of the director or related party."
It is noticeable that, apart from the anonymous information about the number and price of shares bought, the rule will have only a limited effect on disclosure about the circumstances of individuals. The requirement to disclose information relating to individuals need not apply to:
employees who are not directors or related parties of directors; or
directors whose incentives have not yet vested – on-market purchases of shares to be held in a trust for future vesting will not generally be made "on behalf of" a particular director.
It is unclear whether the second of these limitations is a deliberate choice. ASX may believe that mandatory reporting of the number and price of shares purchased on behalf of an identified director addresses the major concern (about the lack of detailed disclosure about the overall effect on the company), and that relating the information to directors with unvested incentives is simply too complex to be addressed through disclosure. Also in many cases where shares are being purchased to be held in trust to meet potential future entitlements, the shares may be purchased to meet potential entitlements of executives in addition to those of a director and the shares purchased will not necessarily be allocated to any particular participant in the incentive plan.