Long-awaited employee share scheme reforms become law

The long-awaited changes to the Corporations Act’s disclosure rules and related requirements for employee share schemes have become law.

The Treasury Laws Amendment (Cost of Living Support and Other Measures) Act 2022 introduces a new Division 1A into Part 7.12 of the Corporations Act 2001 (Cth) (New Division). The New Division, which takes effect from 1 October 2022, replaces and expands the current ASIC class order relief in relation to employee share schemes for listed and unlisted bodies.

Specifically, the New Division makes it easier for listed and unlisted companies and listed registered management investment schemes to access ‘regulatory relief’ from the Corporations Act’s securities disclosure (e.g., prospectus), licensing, advertising, anti-hawking and on-sale regulatory requirements in relation to offers of interests under employee share schemes (ESS interests).  An entity will require such regulatory relief where its offers of ESS interests are not otherwise exempt from the disclosure and related requirements under the Corporations Act – for example, offers made to senior managers of the entity or its related bodies or under the small-scale offering exemption, which exempts raisings of not more than $2 million in total from not more than 20 personal offers in any 12 months.

So, what’s changed?

While the relief under the New Division is similar to that already afforded by ASIC Class Order [CO 14/1000] Employee incentive schemes: Listed bodies and ASIC Class Order [CO 14/1001] Employee incentive schemes: Unlisted bodies (Class Orders), the conditions to the relief under the New Division are significantly less onerous than those under the Class Orders, particularly for unlisted bodies.

The most significant change for unlisted bodies is that offers of ESS interests will be able to be made to employee share scheme participants for potentially an unlimited number of underlying securities.  The key qualification to this is that a participant cannot, under the terms of those offers, pay in any 12 month period more than a Monetary Cap calculated as:

• $30,000; plus

• 70% of the sum of the amounts of any distributions on ESS interests and cash bonuses received by the participant in the relevant 12 month period.

In the case where the ESS interests are options or incentive rights, the $30,000 component of the Monetary Cap, to the extent not utilised by the participant in exercising the options or incentive rights in a 12 month period, can be carried forward for up to a further four years.  The Monetary Cap does not apply to amounts that only become payable by the participant in connection with a listing on ASX (and potentially foreign securities markets where approved by ASIC) or certain offers from unrelated third parties to acquire ESS interests.

The new Monetary Cap is in contrast to the much more limited cap under the current Class Order CO 14/1001 for unlisted bodies, which requires that the value of all offers of ESS interests (as opposed to the amount payable by the participant as described above) to any person in any 12 month period not be greater than $5,000.

Other conditions to regulatory relief have been relaxed too, including:

• broadening participation in employee share schemes beyond employees, directors and only certain contractors to all of the entity’s contractors and service providers;

• permitting offers of ESS interests that do not require any monetary payment from participants (e.g., options granted for nil monetary consideration and with a nil exercise price) to be made without any specific disclosure to participants (other than a statement that the offer is made under the New Division).  Offers of ESS interests for monetary consideration will still need to be made with disclosure, i.e., under an ESS offer document, which has similar content requirements to offers under the Class Orders.  (The disclosure requirements under the Class Orders apply irrespective of whether the offers of ESS interests are for monetary consideration);

• allowing entities the freedom to specify an issue cap for ESS interests in their constitution.  Where no cap is specified in the entity’s constitution, the number of ESS interests that an entity may offer at any time is that number which it reasonably believes will not result in the number of underlying securities issuable under that offer (when aggregated with underlying securities issued or issuable under offers of ESS interests made by the entity in the previous 3 years) exceeding 5% of its fully paid shares or interests for a listed entity or 20% of its fully paid shares for an unlisted body.  The issue cap does not apply to offers of ESS interests for no consideration;

• greater flexibility for unlisted bodies to involve loan and contribution (e.g., salary sacrifice) plans in their employee share schemes;

• broadening the range of ESS interests that may be offered (e.g., for unlisted bodies, removing the limitation that the ESS interests or their underlying shares must be ordinary shares and, for listed entities, removing requirements relating to the period that their securities need to be trading without suspension); and

• removing the requirement that entities notify ASIC of their reliance on the regulatory relief. (The Class Orders require the filing of a ‘notice of reliance’ with ASIC.)

Why are these changes significant?

The New Division cuts previous ‘red tape’ to provide entities with Australian-based employees and service providers substantially greater flexibility to offer participation in their employee share schemes outside the Corporations Act’s existing exemptions from disclosure (e.g., the senior manager exemption and small-scale offerings exemption).  This is significant because those existing disclosure exemptions are limited and quickly exhausted, particularly by entities in a high-growth phase that are rapidly expanding their employee base.

The replacement of the $5,000 value cap with the new Monetary Cap will go a long way towards assisting start-ups and other unlisted bodies to attract and retain talent.  It also puts the Australian securities law disclosure regime for employee share schemes closer to a level footing with that of international jurisdictions, many of which have higher caps or no caps for participation in employee share schemes.

Practical implications going forwards

We expect that entities will need to update their employee share scheme offer documentation to take advantage of the regulatory relief under the New Division for offers made from 1 October 2022.

For entities making offers under their employee share schemes in the meantime, they will need to continue to comply with the existing law, including relying on the current Class Orders where their conditions can be met.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).