Changes to the Employee Share Scheme regime
13 July 2022
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The Treasury Laws Amendments (Cost of Living Support and Other Measures) Act amended the Corporations Act 2001 (Cth) (Act) earlier this year to insert a new regime for employee share schemes, which will take effect on and from 1 October 2022. If an employee share scheme (ESS) receives relief under this new regime, the standard regulatory requirements for businesses offering shares and financial products to retail clients under the Act will not apply. This will mean:
Whilst the new regime offers additional relief to unlisted entities, it comes with some additional obligations (for both listed and unlisted entities) which makes some parts of the new regime more difficult to comply with when considered against the existing ASIC Class Orders [CO 14/1000] and [CO 14/1001]. Further, there is a significant gap in the new regime which does not provide any on-sale relief unless the relevant seller (an employee in an ESS) reasonably believes they received that interest under an ESS, and they reasonably believe they are only selling their interest to another participant in the same ESS. This has obvious implications for listed entities and we encourage ASIC to issue further class order relief dealing with this issue.
The Act is not specific on who can offer interests in an ESS (as compared to the old requirement that only an issuer or associated bodies corporate (for listed bodies) or wholly owned subsidiaries (for unlisted bodies) can offer interests in an ESS). This should provide additional flexibility in terms of offering capability.
The class of people who can receive an offer has been substantially broadened and made consistent between listed and unlisted entities. All entities can make offers to:
There has been a substantial expansion of what interests can be issued under an ESS by an unlisted body. Unlisted bodies can now offer a fully paid share or a unit in, an incentive right, or an option to acquire, a fully paid share (rather than only ordinary fully paid voting shares). Listed entities can issue a broad range of interests.
There are a broad range of plan structures that can be used by both listed and unlisted entities. However, particularly in relation to unlisted entities, there are substantial disclosure requirements which must be complied with, including in relation to valuation information. Further, the Act has an express statement that an ESS cannot take advantage of the no-consideration exemption in section 708(15) of the Act.
An ESS with a trustee is only able to receive an interest in an ESS if the trust deed states that:
If an offer that is made by a trustee who manages an ESS requires a participant to make a payment to participate, a form of offer document must be issued. The offer document must:
Offers of eligible interests to participants under an ESS which would not ordinarily require disclosure, such as offers to senior managers, are not required to comply with the trust requirements. However, offers utilising the small-scale offering exemption and a trust deed must comply with the trust requirements.
For an ESS with an associated contribution plan to be eligible for relief:
If an offer is made with a related ESS contribution plan, each participant receiving the offer must be provided with:
The obligation for payment under a contribution plan must fall on the individual who receives the interests under the ESS, whether they be the Primary Participant or a related participant.
Offers of eligible interests to participants under an ESS which would not ordinarily require disclosure, such as offers to senior managers, are not required to comply with the contribution plan requirements. However, offers utilising the small-scale offering exemption and a contribution plan must comply with the contribution plan requirements.
For an ESS with an associated loan to be eligible for relief:
If an offer is made with a related loan, each participant receiving the offer must be provided with:
The obligation for repayment of the loan must fall on the individual who receives the interests under the ESS, whether they be the primary participant or a related participant.
Offers of eligible interests to participants under an ESS which would not ordinarily require disclosure, such as offers to senior managers, are not required to comply with the ESS loan requirements. However, offers utilising the small-scale offering exemption and a loan must comply with the ESS loan requirements.
Any offers under an ESS relying on this new regime must comply with the issue cap. This occurs if the sum of the two numbers below do not exceed the specified percentage of interests actually issued by the body (being 5% for listed entities and 20% for unlisted entities unless specified otherwise in the constitution):
The issue cap does not apply to interests issued under an ESS where payment is not required to participate.
Offers of eligible interests to participants under an ESS which would not ordinarily require disclosure, such as offers to senior managers or small-scale offerings are not required to comply with the issue cap.
Unlisted entities offering an ESS are subject to a monetary cap. The monetary cap only allows a participant to outlay up to $30,000 on offers over a 12-month period, plus an additional 70 per cent of any dividends and 70 per cent of cash bonuses received in that year.
The monetary cap applies to the total amount paid by a participant for an individual offer. If multiple offers are made to a participant which if accepted would breach the monetary cap, the terms of the offer would need to be drafted so payments can only be made up to the monetary cap.
The cap is used up as the participant expends money or takes out loans on offers. This includes current offers, for example purchasing shares upfront, as well as exercising rights to purchase shares under earlier offers of options, as well as payments made directly or payments made using a contribution plan. Money paid into a contribution plan which has not yet been exchanged for interests does not use up the monetary cap.
The monetary cap does not apply when there is a liquidity event, such as a business being purchased or listed on a financial market.
A participant’s monetary cap can be accrued under an option plan in respect of unexercised options over a 5-year period.
Offers that do not require payment to participate, do not require disclosure to be eligible to rely on the new regime.
For an offer that requires payment upfront, the participant must be provided with a set of specified warnings 14 days before the making of the offer. That is, participants cannot acquire an interest in the ESS until 14 days after receiving the relevant offer documents.
For a listed body corporate or listed registered scheme, the offer document must:
For an unlisted body corporate, the offer document must:
The financial information about an unlisted body corporate, which must be provided with an ESS offer to each participant is:
The financial information must be accompanied by a statement as to whether the financial information has been audited.
A valuation can include:
Offer documents for both listed and unlisted entities must include the following:
When do you need to disclose?
Offers made by listed companies that do not require payment to participate, do not require any disclosure to be eligible for regulatory relief.
Entities with offers that require upfront payment (other than for options) must provide disclosure 14 days prior to making the offer. The type of disclosure required depends on whether the entity is listed or unlisted.
Option plans and incentive rights in a body corporate that is not included on an official list of a financial market require two points of disclosure in order to rely on this new regime. Option plans and incentive rights require disclosure upfront, regardless of whether acceptance of the offer requires payment or not. However, where there is no payment, the offer document is the only form of disclosure required at the point of offer. Options with both an upfront price and exercise price will require streamlined disclosure at both points.
Additionally, a valuation, financial statements and solvency statements must be provided at least 14 days prior to each exercise period during which an option or incentive right can be exercised or an amount can be paid allowing the incentive right to vest.
Authors: Miriam Kleiner (Partner, Legal Governance Advisory)
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.
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