Ann: WAV/RULE: DIL: DIL - Waiver from NZSX Listin

• Release Date: 05/06/13 10:58
• Summary: WAV/RULE: DIL: DIL - Waiver from NZSX Listing Rule 7.3.2(a)
• Price Sensitive: No
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DIL
05/06/2013 08:58
WAV/RULE

REL: 0858 HRS Diligent Board Member Services INC (NS)

WAV/RULE: DIL: DIL - Waiver from NZSX Listing Rule 7.3.2(a)

5 June 2013

NZX Regulation Decision
Diligent Board Member Services, Inc.
Application for Waiver from NZSX Listing Rule 7.3.2(a)

Background

1. Diligent Board Member Services, Inc. ("DIL") is a Delaware incorporated
company governed by US law, with ordinary shares ("Shares") Quoted on the NZX
Main Board.

2. As advised to the market on 24 December 2012, DIL's board of directors
("Board") appointed a special committee of independent directors ("Special
Committee") to examine DIL's past stock option issuances. The Special
Committee found that three option awards, one under the 2007 Stock Option and
Incentive Plan ("2007 Plan") and two under the 2010 Stock Option and
Incentive Plan ("2010 Plan") exceeded the applicable plan caps on the number
of shares covered by an award issued to a single recipient in a particular
year, as specified in each of those plans.

3. On the recommendation of the Special Committee, the option awards which
exceeded the caps under the 2007 Plan and the 2010 Plan will be cancelled.
These include option awards which were granted to Alessandro Sodi, DIL's
chief executive officer ("Excess Options"). The Board has approved a
compensation package to be provided to Mr Sodi in substitution for the
cancelled options ("Substitute Plan").

4. The Excess Options comprised:
(a) 1,600,000 fully vested options with an exercise price of US$0.14 per
Share issued in 2009 under the 2007 Plan; and
(b) 2,500,000 options (which remain to be vested) with an exercise price of
$US0.82 per Share issued in 2011 under the 2010 Plan ("2011 Options").

5. The negotiated terms of the Substitute Plan are documented in a
replacement grant agreement entered into between Mr Sodi and DIL on 3 May
2013 subject to shareholder approval at DIL's 2013 annual meeting on 4 June
2013 ("Annual Meeting").  Specifically DIL shareholders will be asked to
approve the:
(a) issuance of options (and the subsequent allotment of Shares upon exercise
of those options) and Shares to Mr Sodi under the Substitute Plan for the
purposes of NZSX Listing Rule ("Rule") 7.3.1(a); and
(b) the granting of awards to Mr Sodi under the Substitute Plan as a Related
Party Transaction pursuant to Rule 9.2.1 as Mr Sodi, is a Related Party of
DIL by virtue of Rule 9.2.3(a).

6. As compensation for the cancellation of the 2011 Options Mr Sodi will
receive an award of 2,500,000 Performance Share Units. Each Performance Share
Unit amounts to a contractual entitlement for Mr Sodi be allotted one Share
at a specified future date.

(a) Mr Sodi's eligibility to receive 2,250,000 Shares is contingent on:
(i) DIL achieving revenue growth of at least 7% during the twelve-month
period ended 30 June 2014; and
(ii) Mr Sodi's continued employment with DIL.

For the purposes of assessing Mr Sodi's entitlement to the 2,250,000 Shares
the relevant Performance Share Units will be considered in four equal
tranches, with Mr Sodi's eligibility to each tranche assessed annually,
subject to his continued employment with DIL. Allotments of Shares pursuant
to the first and second tranche will be split with 50% of the Shares allotted
on 15 February 2018 and the balance on 15 February 2019.  Allotments of
Shares pursuant to the third and fourth tranches will occur on 15 February
2018 and 15 February 2019, respectively.

(b) Mr Sodi's eligibility to receive the balance of 250,000 Shares is
contingent on:
(i) DIL achieving either at least 15% fully diluted earnings per share
("EPS") growth or 15% total shareholder return ("TSR") growth in four
one-year performance periods beginning 1 April 2013; and
(ii) Mr Sodi's continued employment with DIL.

For the purposes of assessing Mr Sodi's entitlement to the 250,000 Shares the
relevant Performance Share Units will be considered in four equal tranches,
with Mr Sodi's eligibility to each tranche assessed annually, subject to his
continued employment with DIL. For any year in which the performance targets
are satisfied, Mr Sodi will be entitled to receive 62,500 Shares. However, if
a performance target is missed for any year(s), but the cumulative fully
diluted EPS growth or TSR growth meet the cumulative performance targets
across the four year performance period, then Mr Sodi will be entitled to
receive the balance of the Shares at the expiry of the four year assessment
period. Allotments of Shares will occur on 15 February 2018.

Application

7. DIL seeks a waiver from Rule 7.3.2(a) to allow the allotment to Mr Sodi of
Shares pursuant to the Performance Share Units after the expiry of 36 months
from the date of the shareholders' resolution detailed in paragraph 5(a).

8. In support of its application, DIL made the following submissions:

(a) The Substitute Plan enables DIL to resolve the unfulfilled contractual
obligation which it has to Mr Sodi under the terms of his employment
agreement and the award agreements documenting the grant of the Excess
Options. Those awards were considered to be reasonable compensation at the
time they were granted and were an important incentive component of Mr Sodi's
remuneration package. If DIL is unable to enter into, and perform its
obligations under, the Substitute Plan it is likely that DIL would have to
agree to a monetary settlement with Mr Sodi. This would not be in the best
interests of DIL or its shareholders.

(b) If the waiver is not granted DIL would have to obtain additional
shareholder approval at a future date to satisfy its obligations to Mr Sodi.
This would be unnecessary given shareholders will have the opportunity to
review, and must approve, the terms of the Substitute Plan (including the
particular terms of the Performance Share Units and the issuance of the
Shares to be allotted pursuant to those awards). Shareholders will be
provided with an appraisal report, which provides an opinion about whether
the Substitute Plan and the terms of the Performance Share Units are fair to
shareholders not associated with Mr Sodi.

(c) Details of the waiver would be included in the Annual Meeting proxy
statement and shareholders would be voting on the Substitute Plan with full
knowledge of the effect of the waiver.

(d) The timeframe for the allotment of Shares to Mr Sodi pursuant to the
Performance Share Units is not in conflict with the purpose of Rule 7.3.2(a).
 DIL will not be able to unduly delay the issue of Shares pursuant to the
Performance Share Units for which they have received shareholder approval.
DIL is not seeking an open-ended waiver and the allotment timeframe and
calculation of the number of Shares which may be allotted are hardwired into
the terms of the Performance Share Units. Those terms cannot be changed
without shareholder approval. The latest date on which Mr Sodi can be
allotted Shares pursuant to the Performance Share Units is 15 February 2019.

(e) This waiver is only required because of extended performance criteria
timeframes that DIL has introduced by the Substitute Plan. These performance
criteria are of significant benefit to DIL and shareholders as they provide
an additional retention incentive for Mr Sodi. DIL could have provided a
shorter performance period which came within the requirements of Rule
7.3.2(a), but that would be of less value to DIL and its shareholders.

(f) There is precedent for granting similar waivers in respect of employee
share schemes, including Fisher & Paykel Appliances Holdings Limited's waiver
from Rule 7.3.2(a), dated 19 March 2007. Waivers pursuant to Rule 7.3.2(b)
have also been granted to the Warehouse Group Limited on 5 February 2007,
Claridge Capital Limited on 15 August 2012, Kiwi Income Property Trust on 5
July 2011. While only the first waiver is from Rule 7.3.2(a), DIL submits
that the policy rationale justifying the other three waivers is equally
applicable to this application.

Rule

9.  Rule 7.3.2(a) provides:

"An issue authorised by resolutions passed pursuant to Rule 7.3.1(a) shall be
completed:
(a) if that issue is made solely to Employees (as defined in Rule 7.3.6)
within 36 months after the
passing of those resolutions..."

Decision

10. On the basis that the information provided to NZXR is full and accurate
in all material respects, and subject to the conditions specified in
paragraph 12, NZXR hereby grants DIL a waiver from Rule 7.3.2(a) to allow it
to issue Shares pursuant to the Performance Share Units to Mr Sodi under the
Substitute Plan after the expiry of 36 months from the date of the
shareholders' resolution approving the issue of Shares to Mr Sodi pursuant to
the Performance Share Units.

Reasons

11. The decision to grant DIL a waiver from Rule 7.3.2(a) is subject to the
following conditions:
(a) DIL obtains shareholder approval for the Substitute Plan and the issue
and allotment of Shares under the Substitute Plan;
(b) NZXR will have the opportunity to review DIL's proxy statement for the
Annual Meeting; and
(c) the terms of the Performance Share Units, including:
(i) the number of Shares allotted to Mr Sodi pursuant to the Performance
Share Units in the relevant period;
(ii) the aggregate of the total number of Shares allotted to Mr Sodi pursuant
to the Performance Share Units; and
(iii) the total number of Shares which could still be allotted to Mr Sodi
pursuant to the Performance Share Units,

 are disclosed in each of DIL's annual reports until such time as no further
Shares may be issued to Mr Sodi pursuant to the Performance Shares Units.

12. In coming to the decision to grant DIL a waiver from Rule 7.3.2(a), NZXR
has considered the following matters:

(a) The policy behind Rule 7.3.2(a) is to prevent an Issuer from having
shareholders approve an issue of equity securities and then delay the actual
issue indefinitely until a particularly favourable point in time;

(b) This will not be an issue in the present case, as the calculation of the
number of Shares which may be allotted are locked into the terms of the
Performance Share Units. Those terms cannot be changed without shareholder
approval;

(c) Shareholders in DIL will be required to approve the terms of the
Substitute Plan, so will be fully aware of the timeframes within which Shares
may be issued under the Substitute Plan;

(d) Details of any Shares issued under the Substitute Plan pursuant to the
Performance Share Units will be published in each Annual Report of DIL
relating to the period in which those Shares are issued. Accordingly,
existing shareholders and any prospective investors will be aware of how the
Substitute Plan operates and the number of Shares that have, and may still
be, issued under the Substitute Plan pursuant to the Performance Share Units;
and

(e) It could be costly and burdensome for DIL to seek further shareholder
approval in respect of each issuance of Shares to Mr Sodi pursuant to the
Performance Share Units after the 36 month time limit in Rule 7.3.2(a) has
lapsed.

ENDS.
End CA:00237050 For:DIL    Type:WAV/RULE   Time:2013-06-05 08:58:15