Issuing Performance Rights: Clarity To Avoid Contention


The Court of the Appeal of the Supreme Court of Western Australia recently had cause to review and consider circumstances when it is appropriate for unstated terms to be implied into an agreement in the matter of Recce Pharmaceuticals Ltd v Ian David Brown in his own capacity and as duly authorised representative of various other persons [2022] WASCA 66.


Interestingly, the dispute arose in relation to the issuing of ordinary shares from performance shares to an officer of a listed company whose role had ceased prior to achievement of the relevant milestone – an issue and question we often have clients seek advice on.



Events Leading to the Recce Pharmaceuticals Case


Recce Pharmaceuticals (Company) gave notice of an EGM to be held on 30 June 2015 at which it intended to seek shareholder approval for the issue of ‘performance’ shares to directors and key management personnel of the Company who were also shareholders (Registered Shareholders) prior to an initial public offering.


The final terms and conditions on which it was proposed that the Company convert one performance share into one ordinary share, following consultation with the ASX, were contingent upon the following conditions being met:


(1) For Class C: the volume weighted average price of Shares as traded on the ASX over 20 consecutive days on which the Shares are traded is not less than $0.60 (Class C Milestone); and

(2) For Class D: the volume weighted average price of Shares as traded on the ASX over 20 consecutive days on which the Shares are traded is not less than $1.20 (Class D Milestone), in each case within 5 years from the date of issue of the Performance Shares.

The Company obtained shareholder approval at the EGM and on 20 August 2015, and the Company directors resolved to issue the Class C and Class D performance shares to the Registered Shareholders.


Between 8 April 2016 and 27 November 2017, each of the Registered Shareholders either resigned or had their engagement with the Company terminated.


The Class C and Class D Milestones were achieved within 5 years of the notice of the EGM and approval by shareholders. As the Registered Shareholders had ceased employment with the Company, the Company refused to issue ordinary shares from the conversion of the performance shares held by the Registered Shareholders. The Registered Shareholders brought an action in the Supreme Court of Western Australia seeking orders compelling the Company to issue the shares by reason of the fact that there was no condition attached to the issuing, requiring that the Registered Shareholders remain employed by the Company.[1]



Hearing and Appeal

The case does not specify why the performance shares were initially issued other than to say that it was prior to the IPO of the company. However, the Company advanced, in this case and the subsequent appeal, that the issuing of performance shares was to incentivise all recipients to help the Company achieve the performance milestones as set out above.

Unfortunately, the terms and conditions did not express this view and simply stated that upon the Company achieving the milestones, the performance shares should be converted into ordinary shares. The Company argued in both matters that a term to the effect that the Registered Shareholders materially contribute to the achievement of the performance milestones should be implied.


At first instance, Master Sanderson held in favour of the Registered Shareholders, stating that there was no clear link between the performance milestones and the purpose for which the Company contended the performance rights were issued. The Company was obligated to issue the ordinary shares.


As alluded to above, the Company appealed the decision of Master Sanderson to the Court of Appeal. The Company contended the same two issues:


·First, that the terms and conditions which govern the performance shares, properly construed, do not entitle the claimants to convert the performance shares into ordinary shares; and


·Second, in the alternative to their first contention, the Company contends that the terms and conditions which govern the performance shares contain an implied term to the effect that conversion was subject to the holders of the performance shares having ‘materially contributed’ to the achievement of the performance milestones.


Unfortunately for the Company, both of their contentions failed and the Court of Appeal found that the Master was correct to hold that the Company was obliged to issue the ordinary shares from the conversion of the C and D class performance shares notwithstanding that the respondents as holders of the performance shares had ceased to be directors or key management personnel of the Company at the time that the performance milestones were satisfied.


The Company was ultimately unsuccessful due to there being no express provision in the terms of issue of the performance shares requiring the Registered Shareholders to have contributed to achievement of the relevant milestones, and to remain engaged by the Company at the time of exercise. The Court was not willing to imply such a term.



Key Take Away


We have recently received a number of queries from clients in relation to performance securities and the conditions attached to the issue or conversion of these securities. The intentions of the issuer are not always clear, due largely to the fact that the documents that specify the terms and conditions of the performance rights are not clearly stated.


We commonly hear from clients that they believed it was a matter of ‘common sense’ that the recipient of performance rights could only exercise if they contributed to the achievement of the milestones and were still involved with the Company at the time those milestones were achieved. As evidenced by the Reece Pharmaceuticals case, that belief will not likely get any traction in the Courts without more.


In light of the Court’s reluctance to imply terms to a contract unless necessary to do so, the importance of seeking considered legal advice prior to finalising any agreement of significance is evident. The Court will not step in to rectify a contract based purely on what one party believes it should have said. This is particularly true when dealing with performance rights, given that every contingency needs to be considered and documented as part of the terms of those rights.


In the event you are the recipient of performance rights or you seek to issue performance rights and wish to negate the need for any possible future litigation in relation to those issues, we are happy to assist you in navigating your queries or concerns.

[1] Brown v Recce Pharmaceuticals Ltd [2020] WASC 993.



To learn more about this area of practice please refer to Commercial law