ASIC introduces technical relief to facilitate Employee Share Schemes in Australia
As flagged in our previous article “Significant updates to Employee Share Schemes in Australia” (available here), despite several improvements made to the employee share scheme (ESS) regime in Australia following the introduction of Division 1A of Part 7.12 of the Corporations Act 2001 (Cth) (Corporations Act), a number of unintended technical issues arose as a result of the legislation. In particular, no on-sale relief was provided for listed entities that make ESS offers to employees (as has previously been the case with the regime provided by ASIC Class Orders [CO 14/1000] and [14/1001] (together, the Class Orders) and prior ASIC relief).
Following requests from a number of stakeholders, ASIC released Consultation Paper CP 364 “Modifications to the ESS regime” (CP 364) on 29 September 2022 (2 days prior to the introduction of the new ESS regime on 1 October 2022) setting out a number of proposals to deal with the various technical issues that were flagged to ASIC and seeking further submissions from stakeholders.[1]
Following that process, ASIC has announced 2 separate legislative instruments to facilitate ESSs. The first, ASIC Corporations (Employee share schemes) Instrument 2022/1021, provides:
a broader exemption for secondary sales of financial products that are quoted on a financial market (section 1100ZD);
more options for the financial information that foreign companies can provide ESS participants, together with the ability to provide an expert valuation of ESS interests that are not ordinary shares (section 1100X);
technical relief so that salary sacrificing arrangements can comply with the requirements for contribution plans (section 1100T);
clarification regarding the time frame for supplementary disclosure to be given to ESS participants (section 1100Z); and
clarification that financial products offered outside Australia do not need to be included when calculating the issue cap (section 1100V).
Although it was anticipated that the Class Orders would be revoked upon the new ESS regime coming into effect, ASIC had noted in CP 364 that it had no intention to revoke the Class Orders and instead proposed that the Class Orders would remain in effect, albeit with the ability to make new offers under the Class Orders to be terminated. ASIC Corporations (Amendment) Instrument 2022/1022 confirms this approach by amending the Class Orders so that the disclosure relief for primary offers provided by those Class Orders only applies if the offer is made before 1 March 2023 and is only capable of acceptance until 1 April 2024. Importantly, the Instrument does not terminate any of the incidental relief provided by the Class Orders.
ASIC has also confirmed that the Class Orders will sunset in the ordinary course on 1 April 2025. Although ASIC has acknowledged that some longer term incentive rights or options issued under the Class Orders may require ongoing relief from the on-sale restrictions in sections 707 and 1012C of the Corporations Act following sunsetting of the Class Orders, no action is proposed to deal with this possibility at this stage.
Key relief under ASIC Corporations (Employee share schemes) Instrument 2022/1021
Secondary sales of ESS interests
As flagged in our previous article, the new ESS regime did not previously provide for any on-sale relief for the sale of ESS interests and therefore a cleansing notice would have been required to ensure any shares issued by a listed entity could be on-sold within 12 months of issue. ASIC’s instrument now provides a broader on-sale exemption in the ESS regime for ESS interests which are quoted on a financial market (i.e. typically shares of a listed entity), provided that an “issuer purpose” test is satisfied (in line with similar ASIC relief such as ASIC Corporations (Sale Offers That Do Not Need Disclosure) Instrument 2016/80).
ASIC has, however, determined that it would be inappropriate for ASIC to extend the relief to provide a broader exemption from the on-sale provisions (as was the case with the Class Orders). Accordingly, any shares issued under an ESS following the exercise of convertible securities (such as options and performance rights) will still require a cleansing notice to be issued where the shares are quoted on a financial market.
ASIC has also modified section 1100ZD to confirm that unquoted ESS interests may be sold to another ESS participant where the seller either acquired the ESS interest in connection with an ESS or otherwise from another ESS participant.
Financial information and valuations
The instrument modifies section 1100X(2) so that entities who are not registered under Part 5B.2 of the Corporations Act (typically foreign entities) may provide financial information that has been prepared in accordance with a foreign accounting standard that the entity uses in its place of origin or in its principal place of business.
Unless the entity reasonably believes the financial information is prepared in accordance with US GAAP, subsection 1100X(2B) requires:
confirmation that there are no material differences between the foreign financial information and the information that would otherwise be required under subparagraph 1100X(2)(c)(i); or
a reconciliation of material differences between the foreign financial information and the information that would otherwise be required under subparagraph 1100X(2)(c)(i).
Subsection 1100X(3) requires certain valuation information to be provided where an unlisted body corporate offers ESS interests for monetary consideration. This includes a valuation that has been prepared consistently with an applicable method approved by the Commissioner of Taxation under section 960-412 of the Income Tax Assessment Act 1997 (ITAA): paragraph 1100X(3)(a).
At present, the only method specified under section 960-412 of the ITAA relates to ordinary shares. Accordingly, the instrument inserts paragraph 1100X(3)(aa) so that ESS interests that are not ordinary shares issued by a company may be valued by an expert (as defined in section 9 of the Corporations Act). Valuations provided pursuant to paragraph 1100X(3)(aa) are subject to the requirement that they are not misleading or deceptive.
Paragraph 1100X(3)(aa) only permits a valuation prepared by an expert if the ESS interest is not an ordinary share issued by a company. However, foreign companies registered under Pt 5B.2 of the Corporations Act can rely on s1100X(3)(aa) to provide an expert valuation of ESS interests that are ordinary shares (on the basis that a foreign entity is not considered a “company” under the Corporations Act).
Technical relief for salary sacrificing
As a result of feedback received by ASIC in response to CP 364, ASIC has modified section 1100T so that it refers to ‘contributions’ (rather than the more restrictive ‘payments and deductions’). The instrument also exempts future gross wages or salary (i.e. salary sacrifice arrangements) and loans from the requirement to be held in an Australian ADI trust account and from the repayment requirement.
To address concerns that section 1100T may require a separate account with an Australian ADI for each ESS participant, the instrument also clarifies that the contributions of more than one participant may be held in the same account.
Supplementary disclosure
The instrument modifies paragraph 1100Z(1)(b) to clarify that an offeror only needs to provide ESS participants with an updated ESS offer document during the application period for the offer (as opposed to the potentially wider period in the legislation).
Issue cap
The instrument modifies paragraph 1100V(1)(b) so that it refers to ESS interests that “may be issued” under offers made in connection with an employee share scheme over the past 3 year period rather than ESS interests that “could have been issued”. This therefore clarifies the issuer does not need to take into account ESS interests where offers have lapsed or the ESS interests have expired.
The instrument also modifies paragraph 1100V(1)(b) to clarify that it only extends to offers received in Australia. Accordingly, offers made to participants in other jurisdictions will not need to be included when calculating the issue cap.
Next Steps
If you have any queries about Employee Share Schemes in Australia, get in touch with our team.
Footnotes
Important
The contents of this publication should not be relied upon as legal advice, but instead as commentary and general information. Specific legal advice about your circumstances should always be sought separately before taking any action based on this publication.
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George Henderson
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