Changes to the Employee Share Scheme regime

What you need to know

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:

• an ESS can be operated without an Australian financial services licence;
• general financial advice can be provided in relation to the ESS without an Australian financial services licence;
• the restrictions on advertising and hawking securities and financial products in the Act will not apply to the ESS; and
• the existing disclosure requirements under the Act will not apply to offers under the ESS.

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.

What you need to do

• Review your existing ESS plan rules to determine whether any amendments are required.
• Review your ESS offer documents.  Depending on the type of ESS being offered, offer documents will require significant amendments.

Who can make and receive offers?

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:

• Full-time employees;
• Part-time employees;
• Casual employees;
• Directors;
• Service providers; or
• A person who is about to fall into one of the above categories, of the body corporate or an associated body corporate that is issuing interests in an ESS, (each a Primary Participant);
• a spouse, parent, child or sibling of the Primary Participant;
• a body corporate which is controlled by the Primary Participant or their spouse, parent, child or sibling; or
• a body corporate that is the trustee of the Primary Participant’s self-managed superannuation fund.

What can be issued under an ess?

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.

What types of plans can be used?

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.

ESSs that utilise a trust

Terms of trust deed

An ESS with a trustee is only able to receive an interest in an ESS if the trust deed states that:

• the activities of the trustee are limited to managing only the ESS of the body corporate – by either transferring interests under the schemes to participant or issuing units in the interests to participants;
• the trustee keeps written records on the administration of the trust;
• the trustee does not take any administration fees out of trust funds, other than reasonable disbursements;
• the trustee only charges fees or amounts to the body corporate or entity responsible for the ESS (i.e. not the participants); and
• if the trustee is an associated body corporate of the body corporate issuing the interests or the responsible entity of the listed registered scheme –  the trustee only exercises voting rights in accordance with the instructions of the participants or consistently with their fiduciary duties.

Required disclosure

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:

• attach the trust deed; or
• include a summary of the trust deed and a statement that the full deed will be made available upon the participant’s request within 10 business days of the request being made; and
• include a term that requires the trustee comply with the trust deed.

When disclosure is not required

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.

Contribution Plans

Terms of Contribution Plan

For an ESS with an associated contribution plan to be eligible for relief:

• the contribution plan must have contributions held on trust in an account with an Australian authorised deposit-taking institution which is solely kept for that purpose;
• the contribution plan must allow the participant to discontinue from the deductions or payments at any time;
• if the participant decides to discontinue, the contribution plan must, within 45 days, cease any deductions from salary or wages, and all deductions or payments, not yet exchanged for interests, must be repaid to the participant; and
• before participating in the ESS, the participant must agree in writing to the terms of the ESS.

Offer terms

If an offer is made with a related ESS contribution plan, each participant receiving the offer must be provided with:

• the terms of the contribution plan; or
• a summary of the terms and a statement that the full terms will be made available upon the participant’s request within 10 business days of the request being made.

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.

When is disclosure not required?

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.

Loan Plans

Loan terms

For an ESS with an associated loan to be eligible for relief:

• the loan must have no interest or fees payable;
• in the event of non-payment of the loan, the rights against the participant are limited to forfeiture of the interests acquired using the loan; and
• if the loan is by an unlisted company, the loan cannot be provided to an existing shareholder.

Disclosure requirements

If an offer is made with a related loan, each participant receiving the offer must be provided with:

• the terms of the loan; or
• a summary of the terms and a statement that the full terms will be made available upon the participant’s request within 10 business days of the request being made.

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.

When is disclosure not required?

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.

General requirements for all ESS

Issue cap

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 number of interests that may be issued, directly or indirectly, as a result of the offer; and
• the number of interests that have been issued, or could be issued as a result of previous offers, in connection with an ESS made during the previous three years.

The issue cap does not apply to interests issued under an ESS where payment is not required to participate.  

When is disclosure not required?

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.

The monetary 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.

Accrual of the cap for option plans

A participant’s monetary cap can be accrued under an option plan in respect of unexercised options over a 5-year period.  

General disclosure requirements

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:

• include the terms of the offer and any relevant loan, contribution plan or trust deed or a summary of those terms with a statement that a copy of the full terms will be provided to the participant on request;
• provide general information about the risks of acquiring and holding the interests being offered;
• state that advice given in relation to the offer does not take into account the participant's objectives, financial situation and needs;
• suggest that the participant obtain personal advice in relation to the offer;
• state the application period during which the participant may accept the offer;
• include the acquisition price of the interest or how a participant could from time to time ascertain the market price of their interest, or if the interest is a unit, option or incentive right, the acquisition price of the underlying product in Australian dollars; and
• draw the participant’s attention to relevant disclosure documents produced in the previous 12 months.

For an unlisted body corporate, the offer document must:

• include the terms of the offer, and any relevant loan, contribution plan or trust deed or a summary of those terms with a statement that a copy of the full terms will be provided to the participant on request;
• provide general information about the risks of acquiring and holding the interests being offered;
• state that advice given in relation to the offer does not take into account the participant's objectives, financial situation and needs;
• suggest that the participant obtain personal advice in relation to the offer;
• state the application period during which the participant may accept the offer;
• draw the participant’s attention to relevant disclosure documents produced in the previous 12 months;
• state that the interest may not have any value and that the value of the interest will depend on future events that may not occur; 
• contain a statement of solvency;
• provide a valuation of the interests being offered; and
• if the interests being offered are non-ordinary shares – contain a statement about the rights that attach to the shares and how this differs to the rights that attach to ordinary shares.

The financial information about an unlisted body corporate, which must be provided with an ESS offer to each participant is:

• if the body corporate must lodge a report for a financial year with ASIC under section 319 of the Act — a copy of the most recent report lodged with ASIC; or
• if the body corporate is a registered foreign body corporate — a copy of the most recent balance sheet lodged with ASIC under section 601CK of the Act; or
• a balance sheet and profit and loss statement prepared in compliance with the Australian or international accounting standards.

The financial information must be accompanied by a statement as to whether the financial information has been audited.

A valuation can include:

• a valuation that has been prepared consistently with an applicable method approved by the Commissioner of Taxation under section 960 412 of the ITAA 1997;
• a disclosure document for any other securities in the same class as the interest that are on offer at the same time and that has been lodged with ASIC;
• a disclosure document for any financial products in the same class as the interest that are on offer at the same time; 
• a copy of an executed agreement for acquiring an ESS interest in that class on arms lengths terms by a third party; or
• a draft sale agreement which can only be used if a sale agreement that is not materially different from the draft sale agreement is subsequently executed.

Offer documents for both listed and unlisted entities must include the following:

• a statement that the offer document and any supporting documents do not include any misleading or deceptive statements or omissions;
• a statement that certain people listed in the legislation (directors of the body, people named in the offer, etc.) are required to inform the body offering interests in the ESS if they become aware of any misleading, deceptive, out of date, omitted or otherwise materially incorrect elements in the offer document or supporting documents;
• a statement that a participant who suffers loss or damage from an out of date or deceptive or misleading statement or omissions or a failure to provide required supporting documents, can recover damages from:
  • the body corporate or responsible entity making the offer;
  • each director of the body corporate or responsible entity making the offer;
  • a person named in any disclosure document with their consent as a proposed director of the body corporate or responsible entity of a listed registered scheme;
  • in the case of misleading or deceptive statements or omissions, a person named in the disclosure documents with their consent who made the misleading or deceptive statement or omission or statement on which the misleading or deceptive statement or omission is based; and
  • in the case of a failure to notify, the persons mentioned above who have an obligation to notify but fail to do so.

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)