HAMILTON LOCKE GUIDANCE NOTE
OPERATION OF EMPLOYEE SHARE SCHEME LEGISLATIVE CHANGES UNDER THE TREASURY LAWS AMENDMENT (COST OF LIVING SUPPORT AND OTHER MEASURES) BILL 2022
This note discusses the recent amendments to the operation of employee share schemes (ESS) regime in Australia that were introduced under the Treasury Laws Amendments (Cost of Living Support and Other Measures) Bill (Bill) with effect from 1 October 2022, reflecting ASIC’s Consultation Paper 364 (CP364) issued on 29 September 2022 where relevant.
Replacing relief previously provided under ASIC Class Orders CO 14/1000 and CO 14/1001 (under which no new offers can be made from 1 January 2023), the new ESS regime seeks to broaden the availability of employee incentive schemes to participants generally, by providing a streamlined regime for listed and unlisted entities to obtain relief from securities and financial services laws when offering an ESS under the Corporations Act 2001 (Cth) (Act).
This summary is an overview only, does not contain all relevant information and should not be relied upon as an alternative to reviewing the Bill, Act and CP364 in their entirety and obtaining legal advice. There are a number of practical and interpretation aspects of the Bill that remain under consultation pursuant to CP364 ASIC and otherwise are expected to be clarified in the coming months.
Operation and effect of the new legislation
Where an ESS receives relief under the Act (Exempt ESS), the standard regulatory requirements will not apply to businesses offering shares and financial products to retail clients. In practice, this means:
- an ESS can be operated without an Australian financial services licence (AFSL);
- general financial advice can be provided in relation to the ESS without an AFSL;
- the restrictions on advertising and hawking securities and financial products in the Act will not apply to the ESS; and
- the existing disclosure requirements with respect to design and distribution obligations do not apply to offers made under the ESS.
Notably, businesses offering ESS where participants do not have to pay or borrow to participate in an ESS will not have to consider or comply with any of those requirements under the Act and when the relevant conditions discussed below are met, relief will also be available in respect of ESS plans where payment is required.
What is an ESS?
An employee share scheme is an arrangement put in place by a business to reward people who contribute to the business, namely directors, employees and service providers (referred to as ‘participants’), with shares or other interests in the business in exchange for their labour.
Employee share schemes come in many different forms. Employee share schemes can:
- be offered in addition to salary and wages;
- be offered to all or only certain groups of people participating in the business (such as senior managers and directors);
- be in 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.
Who can participate in an Exempt ESS? (Section 1100(L) of the Act)
The class of people who can participate and receive an offer has been broadened and is now the same for both listed and unlisted entities.
An ESS Participant under the Act means:
- a Primary Participant mentioned in s1100(L)(1)(a) in relation to the scheme; and
- a Related Person mentioned in s1100(L)(1)(b) in relation to the scheme.
As a result, the following persons may now receive ESS offers and (provided all other conditions are also met) allow for an Exempt ESS.
| PRIMARY PARTICIPANTS | RELATED PERSONS |
|---|---|
| Full time employees | A spouse, parent, child or sibling of the Primary Participant. |
| Part-time employees | A body corporate which is controlled by the Primary Participant or their spouse, parent, child or sibling. |
| Casual employees | A body corporate that is the trustee of the Primary Participant’s SMSF. |
| Directors | |
| Services providers | |
| 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 |
Types of interests that can be issued under an Exempt ESS
There has been an expansion of what interests can be issued under an Exempt ESS compared to the previous relief available under the Act and Class Orders, specifically by an unlisted body, as follows:
| Listed Bodies Corporate | Unlisted Bodies Corporate | Registered Schemes |
| Fully paid shares | Fully paid shares | an interest in the registered scheme that is tradable on a financial market |
| Beneficial interest in a fully paid share | A unit in, an incentive right in relation to, or an option to acquire one of the above interests | a unit in, an incentive right in relation to, or an option to acquire an interest in, the registered scheme that is tradable on a financial market |
| A stapled security | ||
| A unit in, an incentive right in relation to, or an option to acquire one of the above interests |
Requirements for all Exempt ESS
a) Issue Cap
The issue cap restricts the proportion of share capital a body corporate can issue under an Exempt ESS (to ensure offers are made for the sole purpose of attracting and retaining employees, not raising funds).
An ESS Exempt offer complies with the issue cap if the sum of the two below numbers do not exceed 5% of listed and 20% of unlisted interests actually issued by the body (Section 1100V(2) of the Act):
- 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 employee share scheme made during the previous three years.
b) A$30,000 Monetary Cap (Section 1100ZA of the Act)
Unlisted entities making Exempt ESS offers are also subject to a monetary cap. The monetary cap only allows a participant to outlay up to A$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 however.
Liquidity Events
The monetary cap does not apply when there is a liquidity event, such as a business being purchased or listed on a financial market.
For this purpose, a “liquidity event” means the point at which either:
- an unlisted company is listed on an official list of a financial market; or
- there is an executed sale agreement to acquire interests (e.g. cash received on a sale), covering the participant’s interests or underlying shares, open to acceptance by the participant or related person.
The monetary cap for a particular participant in a given year will be calculated as follows (and is independent of the monetary cap for any other Primary Person that may be a Related Person of such participant):
| Monetary cap for options and incentive plans |
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |
| <A$30,000 | <A$30,000 | <A$30,000 | <A$30,000 | <A$30,000 | <A$30,000 |
| +70% of dividends | +70% of dividends | +70% of dividends | +70% of dividends | +70% of dividends | +70% of dividends |
| +70% of bonuses | +70% of bonuses | +70% of bonuses | +70% of bonuses | +70% of bonuses | +70% of bonuses |
| + < unexercised options from Y1 | + < unexercised options from Y1, Y2 | + < unexercised options from Y1, Y2, Y3 | + < unexercised options from Y1, Y2, Y3, Y4 | + < unexercised options from Y2, Y3, Y4, Y5 (but not Y1) |
Accrual of the monetary cap
As displayed in the table above, a participant’s monetary cap can be accrued in circumstances of an option plan, in respect of unexercised (i.e. not taken up) options over a 5-year period (to a maximum of A$150,000). However, while unexercised options accrue, the dividends and bonuses component of the monetary cap cannot accrue.
Trustees managing an employee share scheme
A business may appoint a trustee to manage the interests issued under an Exempt ESS if the trust deed meets the requirements under Section 1100S of the Act – namely, the trust deed must state:
- the activities of the trustee are limited to managing only the ESS of the body corporate – 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 administration fees out of trust funds, save for reasonable disbursements;
- the trustee only charges fees to the responsible body corporate or entity of the ESS; and
- if the trustee is an associated body corporate of the body corporate issuing the interests or responsible entity of the listed registered scheme, the trustee may only exercise voting rights consistent with the participants’ instructions or the trustee’s fiduciary duties.
The trust deed must ensure the trustee acts in the best interests of the participants, which minimises financial risk to the participants and any conflicts of interest.
If the managing trustee of an ESS makes an offer that requires a payment to participate, the offer document must include (Section 1100W(2)(h) of the Act):
- the trust deed; or
- a summary of the trust deed and statement that the full deed will be made available upon the participant’s request.
If a participant requests the full terms of the deed, those terms must be provided within 10 days (Section 1100Y(1) of the Act).
Employee Share Scheme Loans
A loan under an Exempt ESS must meet the following requirements (Section 1100U of the Act):
- the loan has no interest or fees payable;
- in the event of non-payment of the loan, the rights against the participant are limited to the forfeiture of interests acquired using the loan (i.e. it is ‘limited recourse’); and
- if the loan is by an unlisted company, the loan cannot be provided to an existing shareholder.
If an ESS Exempt offer is made with a related loan, each participant receiving that offer must be provided with:
- the terms of the loan; or
- a summary of the terms and statement that the full terms will be made available upon the participant’s request.
If a participant requests the full terms of the loan, those terms must be provided within 10 days (Section 1100Y(1)(c) of the Act).
The repayment of a loan provided in relation to an ESS falls on the person who receives the interests under the ESS.
Disclosure
Employers must disclose certain information to ESS participants in relation to the interests they receive under an Exempt ESS offer either:
- before the interest is issued or sold (Upfront), and/or;
- after the interest is issued or sold but before an option or incentive right can be exercised (Exercise).
The timing, frequency and materials provided for the purpose of these disclosures depends on the type of ESS interest being offered and whether the disclosing body is a listed or unlisted body corporate.
| Type of Offer | Upfront | Exercise |
| Offers without upfront payment |  | |
| Offers with upfront payment |  | |
| Offers of incentive rights and options with payment on exercise | (For offer document only) | |
| Offers of incentive rights and options with payments both upfront and on exercise | | |
For any Exempt ESS offers involving upfront payments, 14 days before making an offer, both a listed and an unlisted corporate must provide the participant with:
- An ESS offer document that must:
- include the term of the offer, any relevant loan, contribution plan or trust deed (or a summary of these terms with a statement that a full copy can be provided to the participant on request);
- provide general information on the risks of acquiring and holding the interests and advise the participant to obtain personal advice;
- state the acquisition price of the interest; and
- state the timeframe for the participant to accept the offer.
- Disclosure documents in relation to a loan, if applicable.
- Disclosure documents in relation to a contribution plan, if applicable.
- Disclosure documents in relation to the trustee holding the interests, if applicable.
Unlisted body corporates must additionally provide for any Exempt ESS offers:
- An ESS offer document that contains a statement that the interest may not have any value and advising on the rights attached to non-ordinary shares, (in comparison to ordinary shares) if relevant (with an independent expert able to provide such valuation).
- Financial information including:
- a copy of the body corporate’s most recent:
- report lodged with ASIC, if relevant;
- balance sheet lodged by a foreign company with ASIC under section 601CK of the Act, if relevant; or
- financial information prepared by a foreign company in accordance with foreign accounting standards, if the above is not relevant;
- a statement clarifying whether the financial information has been audited; and
- a statement that the entity is solvent; and
- a copy of the body corporate’s most recent:
- A valuation of the interests being offered (that may be prepared by an independent expert, where a method approved under the relevant taxes act is not used).
Before each exercise period during which an option or incentive right can be exercised or vested a valuation, financial statements and solvency statements must be provided at least 14 days in advance: Section 1100Y(4)(b) of the Act.
After receiving disclosure documents, a participant cannot obtain an interest until 14 days after the date of receipt.
Exceptions
The Act still contains other disclosure exemptions for certain offers of securities generally, and these exemptions continue to apply (Sections 708 and 1012D of the Act).
Penalties for Breaching the ESS Exempt Regime
If the relevant requirements are not met, the ESS will not receive regulatory relief and, consequently, will be in breach of various prohibitions in the Act regarding selling securities or financial products without disclosure.
The limitation period for civil suits and ASIC taking enforcement action begins when the regulatory relief is revoked (being when the offer is no longer compliant). In addition, the general law regarding false and misleading conduct, duties and related civil and criminal penalty regimes will also apply.
