Clarification on issue cap requirements under employee incentive plans

Corporate News - 28 October 2022

As set out in our earlier corporate comment, new Division 1A of Part 7.12 of the Corporations Act 2001 (Cth) (Corporations Act) came into effect on 1 October 2022 to assist companies with accessing ‘regulatory relief’ from disclosure requirements under the Corporations Act in the context of employee incentive schemes (New Regime). Access to the relief is subject to certain conditions including rules relating to the number of securities that can be offered under an incentive scheme. ASIC has recently provided clarification on how these requirements work in Consultation Paper 364: Modifications to the ESS regime.
Under the New Regime, an issue cap will not apply where the company only offers incentive securities:

  • for no monetary consideration (e.g., bonus shares, zero exercise price options or performance rights); or
  • which fall within a disclosure exemption under section 708 of the Corporations Act (e.g. offers to directors and senior managers or other sophisticated investors).

However, offers of incentive securities involving consideration (whether upon grant or upon exercise/vesting of the awards) must comply with an issue cap. For listed entities, the cap is set at 5% under the Corporations Act unless increased in the company’s constitution. Importantly, in these circumstances, all securities issued in the prior 3 years will be included in the issue cap calculation – the securities requiring monetary consideration as well as any securities issued for no consideration and securities issued under a disclosure exemption. This differs from the prior position under ASIC Class Order 14/1000 where issues to directors and senior managers and other sophisticated investors did not count towards the 5% cap.
In light of this, companies may wish to consider including a higher issue cap in their constitution to allow for more than 5% of securities to be issued under an employee incentive plan whilst still utilising the relief made available under the New Regime. Alternatively, it may also be worth considering adopting different incentive plans for different classes of participants with distinctly different terms to ensure there is no overlap. This would need to be carefully considered in the circumstances.

Placement capacity
As a reminder, the issue cap under the New Regime relates to disclosure relief. This is a separate issue to the 15% placement capacity exemptions under the ASX Listing Rules which are concerned with dilution of shareholders. For Listing Rule 7.1 purposes, where shareholder approval of the incentive plan itself is obtained, all issues of securities under the plan will not take up placement capacity up to the maximum approved by shareholders.  The number of securities approved by shareholders under the Listing Rules is separate to the 5% cap (or any higher cap permitted by a company’s constitution) under the New Regime and applies irrespective of whether consideration is payable for a grant or exercise of awards.

Alternatively, where an incentive plan is intended for director participation only, companies may decide not to seek shareholder approval of the plan itself but will rather seek separate approval of the issue to directors under Listing Rule 10.11 or 10.14. If approval is obtained under those Listing Rules, the issue of securities to directors will again not consume placement capacity. In all circumstances any resolutions to approve incentive plans will need to state the maximum number of securities to be issued under the plan.  
As always, we are happy to provide further guidance on these issues, if required. Please contact us at our Perth or Melbourne office for assistance.

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