- On 31 October 2014, after almost 12 months of consultation, ASIC has executed significant reforms to the way that Australia’s securities laws apply to equity incentive plans.
- While ASIC’s reforms give local and foreign organisations much needed (and immediately available) respite from the web of Australian legal requirements in this area, the true benefit of these changes will not be realised until the government aligns its taxation and accounting regulatory settings.
- There remains considerable conditionality to the class order relief and organisations must ensure that they structure their equity incentive plans and offers carefully in order to satisfy these conditions.
- Listed companies are expected to take advantage of the new regulatory relief immediately. Unfortunately, the conditions imposed on the relief for unlisted companies (while substantially more accommodating than the previous class order) will mean that take up by this segment is likely to be low.
Who is affected?
All of the following that wish to offer equity incentives to their Australian workforce:
- ASX listed organisations
- Global organisations that are listed on recognised stock exchanges
- Private companies (noting that relief is significantly less generous for unlisted companies)
- Organisations that have not implemented an equity incentive plan in the past due to the complexity of legal regulation
- Organisations that have implemented an equity incentive plan but compromised their key objectives in order to satisfy legal regulation at the time
- Individuals working in Australia that wish to receive equity for their exertion
Our point of view
- The release of ASIC CO 14/1000 (Listed Companies) and ASIC 14/1001 (Unlisted Companies) has addressed many legal impediments to the implementation of equity incentive plans in Australia. We expect listed companies will take advantage of the new relief immediately. While the relief has been expanded for unlisted companies as well, many will find the benefits of granting a relatively low economic opportunity to participants (i.e. a maximum grant of $5,000 worth of equity per individual per annum) to be outweighed by the costs of plan implementation and ongoing administration.
- While the new ASIC class orders move the dial in the right direction, the critical intersection of the legal framework with the taxation and accounting frameworks continues to be managed by Australia’s regulators in a piece meal (and therefore sub-optimal) way. The first opportunity to correct this will be for Treasury and ASIC to collaborate on the implementation of the recently announced changes to the taxation of employee share schemes in Australia. Getting the regulatory settings moving in the same direction in relation to employee share schemes will be a litmus test for the government’s ability to execute on its broader innovation agenda.
- Organisations now have an excellent opportunity to revisit and update their equity incentive plans and take advantage of Australia’s new legal framework. We would expect that changes such as simplifying plan documentation and removing many of the administrative procedures that were in place to cater to historic regulatory requirements will save significant time and money.
- By allowing performance rights to fall within the class order relief notwithstanding ASIC’s characterisation of them as derivatives rather than securities for Corporations Act purposes is a significant step forward. It has removed material uncertainty and regulatory risk from the offers of performance rights – the dominant listed company equity incentivisation instrument in Australia. We expect to see growth in the use of non-traditional equity instruments that are tailored for the relevant organisation’s circumstances (e.g. the use of share appreciation rights that can be cash/equity settled in high risk, high growth listed companies).
- While the consultation process was protracted, ASIC deserves credit for responding to the vast majority of feedback it received on the draft class order relief and, in most cases, adapting the final relief to address this feedback.
A summary of key changes for listed companies
There has been somewhat of a revolution to the types of equity incentive instruments that can be offered by listed organisations under the new class order. The changes (principally concerning rights in shares including those that can be cash or equity settled and, if the latter, by issue or transfer) will be particularly welcomed by global companies that have been restricted from offering certain types of restricted stock units (RSUs), share appreciation rights (SARs) and depository interests into Australia without significant adjustment for the local regulatory environment.
Similarly, the new class order provides for offers to a greater cross-section of the workforce as listed bodies can now make offers to both executive and non-executive directors, full-time or part-time employees, certain contractors and casual employees (being those working a pro-rata equivalent of 40% or more of a comparable full-time position) and certain prospective employees, directors and contractors.
There have also been changes to the general conditions of the listed body class order relief including that:
- the relevant body must have been listed for at least 3 months at the time of the offer, without suspension for more than 5 trading days
- the equity opportunity the subject of an offer under the new class order, when aggregated with shares issued and that may be issued under the new class order or an equivalent ASIC relief instrument over the previous 3 years, must not exceed 5% of the relevant class of the shares.
A summary of key changes for unlisted companies
The scope of the previous class order for unlisted companies was narrow and had limited use other than for offers of options as part of a pre-IPO round of funding and incentivisation. While the new class order significantly expands the scope of the relief for unlisted companies, in our view, its take up will be limited to those unlisted companies wishing to make small grants of ordinary shares to a broad population of their Australian workforce.
The increased flexibility offered in the listed body class order around the type of equity instruments that may be offered and the type of participants that may receive offers is largely mirrored in the unlisted body class order.
Other conditions of the unlisted body class order relief to note include that:
- ordinary shares, or units in, or options or rights over, ordinary shares are offered – this is unfortunate because many unlisted companies wish to share the economic benefits of share ownership with their workforce but not the control or voting benefits
- the offers are made for no more than nominal consideration
- the equity instruments do not require payment of more than nominal consideration upon vesting/exercise unless sufficient information is provided to enable the participant to make an informed judgement on the value they receive - this information will need to take the form of a ‘valuation document’ which is defined to include a prospectus, an independent expert’s report or an agreement with a third party sale agreement where a value is put to the relevant equity instrument no participant receives in aggregate offers of more than $5,000 in value per year (such value to be determined by the body’s directors) – note however that the tax exemptions for equity issuance to employees only extend to $1,000 of value per year
- the equity opportunity the subject of an offer under the new class order must, when aggregated with shares issued and that may be issued under the new class order or an equivalent ASIC relief instrument over the previous 3 years, not exceed 20% of the relevant class of the shares.
- the offer documents are to include certain financial information and a directors’ solvency statement.
Other notable developments
- The offer documentation to be provided to participants must be presented in a clear, concise, and effective manner, and must also include certain disclosures and warning statements.
- New conditions have been imposed on bodies that operate trusts in conjunction with their equity incentive plans. Previously, the trust requirements applied to offers made “through a trust” – a test that was not widely triggered. Under the new class order, where a body makes an offer in relation to which a trustee holds or will hold the underlying eligible products, the new trust requirements will apply. In particular, conditions relating to the activities of the trust, the exercise of votes on shares held by the trust, and the maximum number of shares that may be held by the trust have been imposed.
- A new ASIC form, which contains certain basic information on the offer, must be lodged with ASIC no later than one month after first relying on the regulatory relief – a marked improvement on the previous 7 day requirement.
- A participant can now renounce an offer in favour of a broader range of nominees including immediate family members, companies owned by the participant or their immediate family members, or corporate trustees of self- managed superannuation funds where the participant is a director of that corporate trustee.
- Companies that have been operating existing incentive schemes in reliance on the previous class order, or equivalent individual relief, will continue to be able to rely on that previous relief without the requirement to transition immediately to the new regulatory relief.
Key actions – Review, Simplify and Tailor your Equity Incentive Plans
- Review your equity incentive plans to determine whether there are adaption requirements or simplification opportunities
- If you have not implemented an equity incentive plan in the past due to the complexity of legal regulation or you have implemented an equity incentive plan whose key objects were compromised in order to satisfy legal requirements, consider revisiting your position or plan.