Significant updates to Employee Share Schemes in Australia.
In Australia, an employee share scheme (ESS) can broadly be described as an arrangement put in place by a company to reward certain people who contribute to its business (namely directors, employees and service providers) with shares or other security interests in the business in exchange for, or in recognition of, their services.
Overview
ESSs come in many different forms. They can:
be offered in addition to salary and wages (subject to minimum wage obligations under the Fair Work Act 2009 (Cth));
be offered to all or only certain groups of people participating in the business (such as senior managers and directors);
offer shares or other interests in the business (such as options or units in a trust);
involve trust arrangements where a trustee holds the shares on behalf of the participants; and
require the participants to make payments or take out loans to participate in the scheme.
A number of tax concessions are available for issues under an ESS pursuant to Division 83A of the Income Tax Assessment Act 1997 (Cth) (Tax Act), including [1]:
tax deferral on the issue of options, performance rights and share appreciation rights;
salary sacrifice tax deferral for acquisitions of up to $5,000 per year;
a tax free discount of up to $1,000 per year on the market value of shares for employees with a taxable income of less than $180,000; and
start-up tax concession for certain grants of shares and options by eligible start-up companies.
From 1 October 2022, amendments to the Corporations Act 2001 (Cth) (Act) [2] will come into effect, which introduce a new Division 1A of Part 7.12 of the Act to provide disclosure and licensing relief for offers made under an ESS (including under associated trust arrangements, contribution plans and loans). These amendments replace the existing regime for ESSs provided under ASIC Class Orders [CO 14/1000] and [14/1001] (together, the Class Orders), which are to be retired effective 1 October 2022.
The new laws are particularly useful for companies that wish to offer ESS interests for no monetary consideration, with minimal disclosure requirements when making such offers. For ESS interests that require monetary consideration, however, there are a number of changes which companies must be aware of prior to making an ESS offer (in particular, unlisted companies).
As a result of the changes, we encourage all companies to undertake a review of their existing ESS plans and associated offer documentation to ensure they can rely on the various disclosure and licensing relief available. Where updates are required, ASX-listed companies may need to seek shareholder approval to amend their ESS plans.
Key Changes
Participant eligibility expanded
Under the Class Orders, ESS relief was only available for issues to directors, full time and part time employees and casual employees/contractors that were 40% or more full time equivalent.
Under the new rules, eligibility is extended to directors, all employees and any service providers (with no minimum requirement of hours served). In addition, eligible participants can nominate certain “related persons” (such as their spouse or a company controlled by them) to receive ESS interests.
Monetary cap increased
Under the Class Orders, there was a monetary cap of $5,000 per participant per year.
Under the new rules, the monetary cap per participant per year has been increased to a base limit of $30,000.
Issue cap relaxed/flexible
Under the Class Orders, issue caps of 5% (listed) and 20% (unlisted) of a company’s fully paid shares applied over a rolling period of 3 years (irrespective of whether monetary consideration was required) when relying on Class Order relief.
Under the new rules, there is no cap on issues made for no monetary consideration. The 5% (listed) and 20% (unlisted) caps will now apply only to issues made for monetary consideration.
In addition, under the new rules, it is possible for a company to specify a higher limit than the above in its constitution.
Contribution and loan plans available for unlisted companies
ASIC’s previous position under the Class Orders was that contribution plans and loan arrangements create additional risks and complexity for participants in relation to an unlisted company and that, given the difficulty in establishing a reliable market price, and the lower level of transparency associated with unlisted companies, all offers made by unlisted bodies and their wholly owned subsidiaries could be for no more than nominal monetary consideration when relying on Class Order relief. By definition, this included contribution plans and loan arrangements which required a participant to make a monetary contribution to acquire ordinary shares (whether upfront via salary sacrifice arrangements or deferred under loan arrangements).
Under the new rules, unlisted companies can now operate share purchase plans and loan plans.
3 month quotation and suspension requirements for listed entities removed
In the case of listed entities, the Class Orders previously required that a company’s shares were quoted on an eligible financial market for 3 months (and that the shares had not been suspended for more than 5 days over the previous 12 months).
The new regime now permits a company to offer ESS interests without any minimum quotation period, or any requirements with respect to suspension of trading in the company’s shares.
Different disclosure requirements for ESS offers with monetary consideration
The Class Orders did not distinguish between offers for monetary consideration and those without, with the same disclosure requirements for both offers.
Under the new rules, offers made for no monetary consideration do not have any specific requirements, other than the need for a statement that the offer is made pursuant to Division 1A of Part 7.12 of the Act. In the case of offers made for monetary consideration, an offer document is required (with specific disclosure requirements) and participants cannot acquire their ESS interests until 14 days after receiving the necessary disclosure from the company.
No on-sale relief for listed entities
Although the Class Orders provided on-sale relief for the sale of ESS interests, the new rules do not set out any equivalent relief. Accordingly, listed entities will need to issue a cleansing notice to ensure that any shares issued (including from the exercise of options and performance rights) may be on-sold within 12 months of issue.
Section 708 exemptions remain available
The various exemptions available under section 708 of the Act (such as the senior manager, professional and sophisticated investor and the 20/12 exceptions) remain available for offers not covered by the new rules. However, in the case of offers made in reliance on the 20/12 exception, entities will need to comply with specific requirements in the case of offers which involve a trust, contribution plan or loan arrangement.
Notice of reliance no longer required
The previous requirement under the Class Orders to issue a “notice of reliance” to ASIC following the first reliance on the relief under the Class Orders is absent from the new rules and, accordingly, there are now no specific ASIC lodgement requirements for ESSs.
ASIC does, however, have the power to require a company to produce documents necessary to enable ASIC to form an opinion as to whether the new rules have been complied with. Similarly, ASIC now has specific enforcement powers, including the capacity to issue “stop orders” where the rules have been breached.
Criminal liability now possible for misleading or deceptive disclosure
There are a number of new offences created under Division 1A of Part 7.12, including misleading or deceptive statements/omissions and misuse of participants’ money being held. In addition, regulatory relief can be revoked if any of the below are breached:
the requirements for loans, trusts and contribution plans;
compliance with the monetary cap;
compliance with the issue cap; and
providing disclosure documents at the required time.
Detailed overview of the new ESS regime
An offer under an ESS which requires payment to participate will be entitled to relief if:
the interests offered, issued, sold or transferred to participants under the scheme fall within certain categories of eligible interests (generally shares and interests in shares such as options and incentive rights);
the participants are directors, employees (including full time, part time and casual), or service providers of the company or an associated company issuing the ESS interests (ESS participants). This includes issues to certain “related persons” of such persons, including:
a spouse, parent, child or sibling of the primary participant;
a company which is controlled by the primary participant or their spouse, parent, child or sibling; or
a company that is the trustee of the primary participant’s self-managed superannuation fund;
any trustee used to manage the scheme meets certain requirements set out in section 1100S;
the offer is expressed to be made under Division 1A of Part 7.12 of the Act;
if the scheme has an associated contribution plan or loan, the contribution plan or loan meets certain requirements under sections 1100T and 1100U, respectively;
in the case of offers which require payment of monetary consideration, certain disclosure documents are provided;
where monetary consideration is required to acquire the ESS interests (or upon exercise of the ESS interests), the total number of securities issued under the scheme over the previous 3 years does not exceed the specified percentage of the company’s issued capital (5% for a listed company or 20% for an unlisted company, unless otherwise specified by regulations or the company’s constitution); and
for an unlisted company, no participant outlays more than $30,000 cash under the scheme in a 12 month period (from the day the ESS participant accepts the offer under the ESS), plus an additional 70% of any dividends and 70% of any cash bonuses received in that year. The cap includes money expended or loans taken out on offers. In the case of unexercised options, the issue cap can be cumulative over 5 years to a maximum total of $150,000 – the amount accrued is the value of interests the participant has the right to purchase in each year under the ESS. The dividends and cash bonus components cannot accrue. The monetary cap is subject to an exemption for liquidity events such as IPOs or share sales.
Notably for listed entities, the previous requirements of quotation of its shares for at least 3 months and not having been suspended for more than 5 trading days in the 12 months prior to the issue are no longer applicable.
ESS offers that do not require payment to participate do not require disclosure to be eligible for regulatory relief. This only applies to offers where there is no payment required upfront, nor at any future stage (e.g. performance rights).
For ESS offers that require upfront payment to participate (or in the case of options, payment to exercise the options), 14 days before making the offer (or exercise of the options), the participant must be provided with:
an offer document that:
includes 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;
provides general information about the risks of acquiring and holding the interests being offered;
states that advice given in relation to the offer does not take into account the participant’s objectives, financial situation and needs;
recommends that the participant obtains personal advice in relation to the offer;
states the application period during which the participant may accept the offer;
draws the participant’s attention to relevant disclosure documents produced in the previous 12 months;
for listed entities, includes 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;
for unlisted entities:
states that the interest may not have any value and that the value of the interest will depend on future events that may not occur; and
if the interests being offered are not ordinary shares – contains a statement about the rights that attach to the shares and how this differs to the rights that attach to ordinary shares; and
for unlisted entities, contains:
certain financial information set out in section 1100X(2), including a statement as to whether the financial statement has been audited;
a statement that the company is solvent; and
a valuation that complies with section 1100X(3).
In the case of options and incentive rights, disclosure is required upfront, regardless of whether acceptance of the offer requires payment. However, if 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. In addition, before each exercise period, a valuation, copies of financial accounts and a solvency statement must be provided at least 14 days prior.
Where issues are made to the trustee of an employee share trust on behalf of ESS participants, applicable conditions also include:
the activities of the trustee are limited to managing only the employee share schemes of the company – by either transferring interests under the schemes to participants 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 company or company responsible for the employee share scheme (i.e. not the participants); and
if the trustee is an associated company of the company issuing the interests or the responsible company of the listed registered scheme – that the trustee only exercises voting rights in accordance with the instructions of the participants or consistently with its fiduciary duties.
There are additional requirements under the regulatory relief which require that:
the offer document and any supporting documents do not include any misleading or deceptive statements or omissions;
certain people listed in the legislation (directors of the company, people named in the offer, etc) must inform the ESS participants if they become aware of any misleading, deceptive, out of date, omitted or otherwise materially incorrect elements in the offer document or supporting documents; and
subject to certain limitations on liability, the offer must permit a participant who suffers loss or damage from an out of date or deceptive or misleading statement or omissions, or a failure to provide supporting documents, to recover damages from the company, directors and certain other parties.
There are a number of newly created offences under Division 1A of Part 7.12, including misleading or deceptive statements offences and offences relating to holding participants’ money. In addition, regulatory relief can be revoked if any of the below are breached:
the requirements for loans, trusts and contribution plans;
compliance with the monetary cap;
compliance with the issue cap; and
providing disclosure documents at the required time.
Unlisted bodies often use trust arrangements to reduce the administration costs associated with offering employee incentive schemes. They can also benefit participants in protecting their beneficial interests by separating these from the other assets of the company. Using a trust also avoids the requirement to cancel shares if the issuer were to buy back shares under Division 2 of Pt 2J.
Where an ESS has an associated contribution plan (which can apply to both listed and unlisted entities), 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;
allow the participant to discontinue from the deductions or payments at any time;
if the participant decides to discontinue – within 45 days any deductions from salary or wages must cease and all deductions or payments, not yet exchanged for interests, must be repaid to the participant; and
before participating in the plan, the participant must agree in writing to the terms of the plan.
Each participant must also 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 on request.
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.
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.
Other conditions can be included in the terms of the loan (such as requirements that dividends received by participants on account of holding interests purchased using the loan, be used to pay down the loan.
Next Steps
If you have any queries about the significant updates to ESS in Australia, get in touch with our team.
Footnotes
[1] In each case, subject to meeting various requirements in the Tax Act. For general information on the tax concessions, see: https://www.ato.gov.au/general/employee-share-schemes/
[2] Introduced via the Treasury Laws Amendments (Cost of Living Support and Other Measures) Act. The bill and explanatory memorandum are available at: https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r6868
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.
Liability limited by a scheme approved under Professional Standards Legislation.
Contact our team
George Henderson
george.henderson@aghlaw.com.au
+61 408 909 575
Alex Dewhirst
alex.dewhirst@aghlaw.com.au
+61 401 759 965