For the first time since 1995, the Australian Securities and Investments Commission ("ASIC") has released an update of its policy relating to Employee Share Schemes ("ESS") and the relief ASIC will give such schemes from the disclosure (prospectus) and licensing provisions of the Corporations Act ("Act"). The updated policy was released on 1 May 2003 and the main principle remains the same - assisting employers to offer shares where the aim of the share offer is not fundraising but rather enabling employees to participate in the ownership of a corporation. A large part of ASIC's policy rationale is to encourage offers where they support the long term mutual interdependence between employers and employees, provided adequate disclosure has been made to investors.
The revised Policy Statement takes into account the changes introduced by the Corporate Law Economic Reform Program Act 1999 ("CLERP") and the Financial Services Reform Act 2001 ("FSRA"). The relief previously available (disclosure, advertising and securities hawking) has been preserved and new categories of relief have been added, such as relief from licensing requirements under the FSRA.
The following is a brief summary of the policy amendments:
- relief from the disclosure requirements of the Act to include relief for certain stapled securities as well as shares;
- consequential relief from the requirement to hold an Australian Financial Services Licence ("AFSL");
- relief for offers of options offered for nominal consideration by companies not listed on the Australian Securities Exchange ("ASX") or an approved foreign exchange at the time of the offer, in that the required undertaking to have a prospectus available during the period in which the options may be exercised need not be operative if at that time the shares - the subject of the options - have been listed for 12 months;
- reduction of the required listing period on an approved overseas exchange for foreign issuers from 36 months to 12 months;
- additional guidance in the Policy Statement on case-by-case relief beyond the class order relief; and
- relief to permit employee share scheme offers to be disregarded for the purposes of calculation of the number or value of offers made in the course of a small scale offering.
(the above amendments appear in detail in Class Order CO 03/184 ("Class Order"), which provides conditional relief from the disclosure provisions for stapled securities, listed shares, units of shares or options over shares and consequential relief from licensing and hawking provisions - the Class Order is thirteen pages long and not capable of brief summary.)
As fundraising is not meant to be the aim of an ESS, the five per cent limit on the number of shares that can be issued under an ESS remains ASIC's major condition for class order relief in relation to disclosure. The limit applies only to those shares issued to employees under an ESS and does not include incidental issues resulting from separate fundraising activities.
The Class Order relief extends only to full or part-time continuing employees (including directors) of the issuing corporation, of a related body corporate or an associated corporation. In this way ASIC seeks to ensure that the prerequisite of mutual interdependence between employers and employees will be maintained. Relief on a case-by-case basis may be provided in the case of casual employees or contractors, and will depend on factors such as the past relationship and likely ongoing relationship between the parties.
In order to ensure that adequate disclosure has been made to investors and that employees are offered shares that are priced in accordance with reliable market information, ASIC will allow disclosure relief only where the shares offered are in a class listed on the ASX or an approved foreign exchange for at least 12 months.
Since the introduction of the AFSL regime, ESS offers may attract the application of the licensing provisions in the FSRA. To deal with this obstacle the Class Order provides relief from the need to hold an AFSL for persons involved in the operation of the scheme. Licensing relief will be given if in the course of the offer the issuer is providing general advice only. ASIC will also grant relief from the need to hold an AFSL for dealing that is incidental to the operation of the ESS, as well as for providing a custodial and depository service that is merely an incidental part of the operation of an ESS, if there appear to be other acceptable protections for investors.
Notwithstanding the width of the ESS class order relief, the Class Order has not been extended to encompass relief for derivatives or other financial products, such as interests in managed investment schemes, foreign collective investment schemes or phantom share plans. ASIC does not see these as involving the same level of mutual interdependence of the parties as an offer of shares or options over shares.
However, ASIC may give case-by-case relief for certain ESS plans. Such relief may be available for:
- small scale offerings;
- partly paid share offers;
- phantom share plans and "cash out" alternatives under other plans; and
- managed investment schemes.
It is important to note that those employers whose ESS do not qualify for disclosure relief in the Class Order will also not receive any automatic licensing relief. In order to ensure compliance with the amended Policy Statement existing ESS may require review of their current terms, as well as a re-examination to determine whether any additional relief has become available.
Marta Jankovic is an associate in Coudert Brothers' Sydney office Corporate Advisory Group.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.