New Employee Share Scheme Regime

Corporate News - 26 August 2022

 

With effect from 1 October 2022, a new employee share scheme (ESS) regime under the Corporations Act 2001 (Cth) (New Regime) will take effect to replace and expand the current relief provided by ASIC CO 14/1000 (for listed entities) and ASIC CO 14/10001 (for unlisted entities) (together, the Class Orders). The purpose of the New Regime is to make it easier for companies to access ‘regulatory relief’ from the Corporations Act requirements in respect of licensing, advertising and hawking, and the design and distribution obligations with a streamlined set of disclosure requirements applying to the ESS.

 Listed entities
 
For listed entities, the New Regime is a welcome change particularly for ‘free’ securities and zero exercise price options. In those cases, offers can be made with no limits provided the offer includes a statement that it is being made under the New Regime.
 
Where offers of securities under the ESS require monetary consideration, the offer will attract the relief under the New Regime provided the offer:

  • is made by a complying offer document (which contains a summary of terms, information about risk and other required information); and
  • complies with a 5% issue cap over a rolling 3-year period (subject to any higher cap in the company’s constitution).
In all cases, issues are subject to any cap set out in the company’s IPO prospectus which summarised the terms of the ESS, or the Notice of Meeting seeking shareholder approval for the ESS under the ASX Listing Rules.
 
Participants will also need to be given a 14-day cooling off period between receiving the offer document and acquiring an interest under the ESS Plan.
 
Helpfully, the New Regime expands the group of eligible participants to include any person who provides services to the company (the requirement for contractors and casual employees to work 40% of a full-time role is no longer a requirement). In addition, the minimum quotation period and notice of reliance required under the Class Order no longer apply under the New Regime.
 
If the securities are offered under a contribution plan, the plan must meet certain requirements to protect employees and if a loan is provided in connection with the offer, the loan must be interest free with no fees and on default recourse must be limited to forfeiture of the securities, again so there is no risk to the employee. Where employee trusts are used, the trust will need to satisfy a “sole activities” test too which is similar to the current position under the Class Order.
 
Note regarding on-sale restrictions
Unfortunately, the 12 months on-sale relief for the issue of securities without a disclosure document that previously applied under the Class Orders does not apply under the New Regime (except where the subsequent sale is to another eligible participant in the same ESS). Otherwise, the company will need to issue a cleansing notice (s708A(5)), if eligible, or a cleansing prospectus (s708A(11)) in order to cleanse securities for secondary sale within 12 months of the issue. Where this isn’t possible, the company will need to impose a holding lock on those shares, or seek to delay the issue until the company is in a position to issue a cleansing notice or a cleansing prospectus.
 
Unlisted entities
 
The New Regime is slightly different for unlisted entities. Again, offers requiring no payment simply need to include a statement in the offer referencing that the offer is being made under the New Regime. However, for offers requiring monetary consideration, the offer will attract the relief under the New Regime for unlisted entities provided the offer:
  • is made by a complying offer document (which contains a summary of terms, information about risk and other required information);
  • complies with a 20% issue cap over a rolling 3-year period (subject to any higher cap in the company’s constitution);
  • the offer document must be accompanied by financial information about the company and a valuation of the security offered or other assurances as to valuation of the type specified under the Corporations Act;
  • the employee must be given a 14-day cooling off period and the offer document must contain specific disclosures required under the Corporations Act; and
  • the offer must be made within the monetary cap of $30,000 (subject to various adjustments) in the 12-month period post acceptance of the offer.

The increased monetary cap from $5,000 currently to $30,000 under the New Regime will be beneficial to many companies. In addition, under the New Regime, if an employee holds unexercised options, the employee may accrue their yearly cap over a five-year period or to a maximum of $150,000. Helpfully, the monetary cap will not apply where the company is sold or listed through an initial public offering shortly after the employee securities are issued.
 
It is important to note that loans to shareholders of unlisted companies will not meet the loan requirements under the New Regime.
 
What to do now
 
Whether companies would like to adopt new ESS plans will largely depend on the intended recipients of those incentive securities and the number of securities to be issued. Clients who choose to continue with their existing Class Order compliant plans but will need to update template offer letters for offers made post 1 October 2022.
 
Please contact us if you would like more detailed advice in relation to the New Regime or if you would like us to assist with preparing offer letters or a new plan.

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