On 31 October 2014, ASIC released updated guidance and prospectus relief for employee incentive schemes in the form of:

  • two new class orders, which replace Class Order [CO 03/184]. One class order relates to listed companies [CO 14/1000] and the other to unlisted companies [CO 14/1001]; and  
  • a  revised Regulatory Guide 49 Employee incentive schemes (RG 49) which has been updated in line with the new relief.

This alert focuses on the relief and changes introduced for listed companies, which will benefit from the new ASIC relief.

In relation to unlisted companies, while the class order relief has been extended to enable offers of a range of shares, options and incentive rights, there are also new restrictions that we believe limit the usefulness of the relief, particularly to start-up companies. These restrictions take the form of a newly introduced cap that restricts offers to $5,000 for each participant in any 12 month period, and require a valuation by directors for this purpose. Additional documentary requirements include providing a set of financial statements to employees, and a directors’ solvency resolution. 

These limitations and associated compliance costs could make it more difficult for unlisted start-up companies to take advantage of the tax concessions for employee share and option schemes, which have been recently announced and are planned to come into effect from 1 July 2015.

Practically speaking

The new relief introduces welcome flexibility and a reduction in administrative burdens for listed companies wishing to offer employee scheme incentives to Australian based participants.  After a long waiting period, ASIC has released a carefully considered, practical relief instrument which has taken into account industry feedback provided during consultation. It is something many listed companies will find was well worth waiting for.

The two key advantages are that listed companies can now:

  • offer a broader range of products, such as performance rights and cash settled awards. These will fall under the new category of "incentive rights" which are broadly defined as conditional rights to acquire underlying eligible securities or receive cash equivalent payments referenced to the price (or change in price) of such securities. This welcome change is in line with the trend for listed entities to move away from offering simple share and option plans towards offering more innovative financial products, including those which economically mimic the performance of issuer stock rather than granting an actual equity interest; and  
  • make offers to non-executive directors, contractors and certain casual employees.  This change again recognises the global shift towards a more mobile and less permanent workforce.

Listed companies are still required to provide participants with an offer document, which must be presented in a clear, concise and effective manner.  The offer document must now include general information about the risks of acquiring securities. This can, we believe, be satisfied easily with a general risk statement regarding investment in securities and we do not anticipate issuers will move to a "prospectus style" risk disclosure which covers, for example, business risks relevant to the issuer or its industry.

The administrative burden of having to lodge the offer document and accompanying materials with ASIC has been replaced by a simple notice of reliance to be filed with ASIC within one month after first relying on the new class order.  The notice of reliance only needs to be lodged once for any particular plan.

The new relief captures key elements of the case by case relief which ASIC has been granting to listed issuers over the past few years, largely to accommodate the shifting trends in employee incentive scheme offerings and with which [CO 03/184] was out of touch.  While some listed issuers may still need to seek specific relief, most will be able to be more flexible in their offerings to employee incentive scheme participants without that additional cost.

More detail on the key changes

The key features of the new [CO 14/1000] for listed issuers are:

  • Broader range of prospective offerees in addition to full-time and part-time employees and executive directors which were covered by [CO 03/184], offers by listed entities can now be made to non-executive directors, contractors (which can include corporate contractors, such as family-owned companies of the contractor) and casual employees who work a 40% pro-rata equivalent of a comparable full-time position. Offers can also be made to prospective participants where the offer is conditional on acceptance of an offer of employment.   
  • Wider range of products can be offered in addition to quoted shares or options over quoted shares which were covered by [CO 03/184], offers can now be made of:
  1. certain depository interests quoted on an approved foreign market, such as Australian CDIs and US ADRs (with a fully paid share as the underlying security);  
  2. interests in ASX-quoted managed investment schemes;  
  3. ASX-quoted stapled securities; and  
  4. options and incentive rights over the above.

The introduction of the "incentive rights" category is a key and long awaited change in the employee incentive scheme space as it will allow issuers to offer incentives such as derivatives and other financial products, and will include cash settled awards and the payment of cash dividend equivalents. 

Debt securities and partly-paid securities are still excluded from the class order but ASIC has indicated issuers may be able to obtain specific relief for other products where policy objectives are otherwise satisfied.

  • Reduced listing period requirement offers can now be made by issuers who have been listed for 3 months or more, whereas companies previously had to wait for 12 months post-listing before being able to make offers.  The securities being offered must have been quoted for at least 3 months with suspension of no more than 5 trading days in 12 months - this is an increase from the 2 trading days which applied under [CO 03/184].  
  • The 5% issue limit continues to apply but with a reduced 3 year look-back period at the time of making an offer, listed companies must have reasonable grounds to believe that the number of underlying shares issued under the offer, together with the number of shares underlying awards issued during the past 3 years under an employee incentive scheme, must not exceed 5% of the total number of shares in that class which are on issue. This is a reduction from the 5 year look-back period which previously applied.   
  • Trust structures continue to be available but with some changes to the conditions which apply, which now provide:
  1. there is no longer a separate annual audit obligation as there was with [CO 03/184];  
  2. trustees can hold the underlying products on either an allocated or unallocated basis;  
  3. the activities of the trust must be limited to holding underlying eligible products and not, for example, a dividend reinvestment plan;  
  4. the trustee must not levy any fees for operating the trust, other than reasonable disbursements (including brokerage and taxes in connection with the trust);  
  5. if the issuer or an associated body corporate is the trustee (rather than a third party trustee being used), the trustee is not allowed to have discretionary voting power; and  
  6. the trustee must not hold more than 5% of the issued capital of the listed body on trust. 
  • Contribution plans continue to be permitted.  Contribution can be made from gross (before-tax) wages or salary, net (after-tax) wages or salary and/or other monies. However, contributions cannot be used to acquire options or incentive rights (performance rights), as these must be issued for no more than nominal monetary consideration.  The holding of any after-tax contributions must be in a dedicated trust account with an Australian ADI, and the notice period for a participant to discontinue participation must not exceed 45 days.  
  • Loans and financial assistance are permitted provided that the arrangements are either no recourse or the recourse is limited to forfeiture of the eligible products acquired under the loan arrangements.  The arrangements must also be fee free and interest free.  
  • The offer document requirement remains and it must now be "clear, concise and effective" and contain disclosure of investment risks. The offer document must be accompanied by a copy of the terms or summary of the terms of the scheme, as was the case previously.    
  • Lodgement of documents with ASIC no longer required but you must lodge notice of reliance the first time you make an offer. This means that within one month after first relying on [CO 14/1000] a listed entity must lodge an ASICForm CF08 Notice of reliance with ASIC. The notice contains certain basic information, including the identity of the issuer, the types of eligible products being offered and the market on which the underlying eligible products are quoted. This notice will not be publicly available on ASIC’s register.  Further notices of reliance are only required if the entity establishes a new employee incentive scheme in reliance on the class order relief.  This will save administrative time and cost for issuers, particularly foreign listed issuers.  
  • Transitional Arrangements. Entities which have relied on, or have approved the implementation of an employee share scheme in reliance on, the former [CO 03/184] or associated relief will be 'grandfathered', and can continue to rely on the old ASIC class order relief.

Unlisted companies

As outlined above, [CO 14/1001] which applies to unlisted companies will now permit offers of ordinary shares, options and incentive rights.

However, there are a number of new conditions which in practical terms will limit the ability of unlisted companies to take advantage of the new relief, including:

  • offers must, in aggregate, not exceed $5,000 in value per participant per year, based on a directors’ valuation made within 12 months before the offer, with the methodology for the valuation being disclosed in the offer document. This is a low dollar limit, especially in the context of start-up companies that traditionally rely on a higher portion of remuneration being in the form of equity incentives compared with other companies. The valuation requirement will also add cost and complexity, and introduce potential liability for directors;  
  • if the company prepares audited financial statements then they must be included with the offer. For other unlisted companies, the offer document must include special purpose financial statements for a 12-month period, which will add an additional cost to compliance with the relief;  
  • the offer document must include a directors’ solvency resolution that is made within one month before the offer; and  
  • while the option or right has not yet been exercised, there is an ongoing obligation to provide financial statements if requested by a participant.

These new conditions mean that unlisted start-up companies could find it difficult to take full advantage of the recently announced tax concessions for employee share and option schemes that are planned to come into effect from 1 July 2015.

Interaction with the "20/12" exemption

ASIC has also made class order [CO 14/978] so that offers under the new employee incentive plan relief will not count towards the issuer’s ability to make personal offers of securities not exceeding 20 issues in 12 months and not exceeding $2 million in total.  This is a welcome addition to the new class orders for listed and unlisted companies that makes the relief more versatile.