Australia: ASIC proposes to update its employee incentives schemes policy

Last Updated: 28 November 2013
Article by Brett Feltham

The Australian Securities and Investments Commission (ASIC) has recently announced that in light of various legislative changes and market developments, it has revisited its policy in relation to employee share schemes and the scope of relief that it grants to requirements under the Corporations Act 2001 (Cth) (Act) for offers made under those schemes.

In our previous article, we discussed the release of a discussion paper by the Federal Government which explored alternatives for making employee share schemes more attractive and easier to implement for start-up companies, primarily focussing on tax concessions.

The discussion paper recognised that tax was only one consideration for companies when establishing an employee share scheme and that another important consideration for companies is compliance with securities laws, including the disclosure requirements in the Act. As discussed in our earlier article, the discussion paper indicated that ASIC would be shortly reviewing the scope of relief available to unlisted entities, such as start-up companies, and whether that relief should be broadened.

That review has resulted in ASIC releasing a consultation paper and a draft regulatory guide. ASIC has requested comments and submissions on those documents by 31 January 2014. It is expected that ASIC will then release the final form of relief which it will make available and the finalised regulatory guide by May 2014.

Current legislative framework and Class Order relief

In Australia, the Act regulates offers to, and investments by, investors, including employees in their employing entities. Unless a relevant exemption applies, or ASIC relief applies, the Act requires companies establishing an employee share scheme to provide a prospectus or other disclosure document to employees, and in some instances, to obtain an Australian financial services (AFS) licence. The Act also prohibits certain other types of conduct in relation to offers under the scheme.

ASIC recognises that employees are often offered the opportunity to participate in the ownership of their employer under an employee share scheme, at least in part, to enhance the relationship between the employer and the employee for their long-term mutual benefit.

When employees are considering whether to accept or reject such offers, they become potential investors in the relevant company, and as a result, they are afforded protections under the Act and must be able to assess the appropriateness of participating in such schemes. However, ASIC facilitates employee share schemes by relieving companies from their obligations under the Act where it considers that the benefits of a scheme outweigh the risks to employees.

Ten years ago, ASIC issued Class Order 03/184 Employee share schemes (Class Order) which provides relief from certain provisions of the Act for employee share schemes. ASIC Regulatory Guide 49 - Employee share schemes also gives guidance on the relief ASIC is willing to grant and ASIC's underlying policy objectives. Since issuing the Class Order, ASIC has provided case-by-case relief to numerous companies in situations not covered by the Class Order.

ASIC review and policy objectives

In addition to developments in market practice in relation to the structuring of employee share schemes, there have been changes to the Act relevant to the Class Order. In light of those factors, ASIC proposes to update its guidance and issue a new class order. In doing so, ASIC intends on using the term "employee incentive scheme" in the proposed class order, as opposed to the term "employee share scheme" used in the Class Order, which suggests a limitation to the types of financial products that may be offered and receive relief.

ASIC's review and preliminary consultation determined that the Class Order did not cover aspects of employee incentive schemes that employers were implementing, or would like to implement, including (among other things):

  • offering employees a range of financial products, including some types of performance rights that ASIC considers to not be securities
  • the use of trusts to hold shares in a pool on behalf of employees
  • the use by unlisted companies of loans to employees in connection with employee incentive schemes, and
  • unlisted companies offering employees an interest in the company that can be realised if the company is sold.

Consultation guide and draft class order

To seek to address the difficulties identified in the review process, as well as to assist it to achieve its desired policy objectives, the consultation paper makes clear that ASIC is considering various options, but favours making substantive changes to the current Class Order relief.

Those changes, if made, will for the most part make it easier for companies to develop an employee incentive scheme and are aimed at broadening the scope of the current Class Order to cover employee incentive schemes for various types of financial products and employees, and using various structures.

Expanding the classes of financial products which may be offered

The Class Order, as it applies to listed companies, currently covers offers for the issue or sale of fully paid shares, fully paid stapled securities, and options over, or units in, fully paid shares.

To reflect the larger range of financial products now being offered under employee incentive schemes, ASIC proposes to facilitate relief for such schemes by widening the scope of the Class Order relief to include offers by listed companies under an employee incentive scheme of:

  • certain specified depository interests, such as Australian CHESS Depositary Interests quoted on the ASX
  • options over, or units in, specified depository interests and stapled securities, and
  • rights to receive certain securities that are conditional on performance (such as performance rights).

ASIC proposes to retain the current relief available in relation to options offered for no more than nominal monetary consideration, but also to expressly clarify that the relief will apply to offers of "performance rights" (as defined by ASIC) made for no more than nominal monetary consideration. Employee incentive schemes involving an offer of performance rights have become increasingly common among Australian and foreign listed companies, with such rights given various names including stock appreciation rights, share rights, equity rights, restricted stock units and performance awards.

Employment or employment-like remuneration arrangements

ASIC's proposed definition of "performance right" is not intended to capture cash payments offered in the context of employment or employment-like remuneration arrangements, where the amount of cash payable is determined by a measure other than an underlying security. For example, a cash bonus where the amount of the bonus is determined by the employer's sales, profits or the level of its carbon emissions, would not meet ASIC's proposed definition of "performance right" and would not qualify for relief under the proposed class order.

As a result, ASIC proposes to provide guidance (including by potentially issuing a separate class order declaration) to confirm that employment or employment-like remuneration arrangements, such as those under which commissions or bonuses may be payable, are not financial products (and importantly are not derivatives) for the purposes of the Act.

Expanding the categories of persons who can participate

ASIC proposes to broaden the range of persons covered by the relief to include, in addition to employees, certain contractors and casual employees, and prospective employees as part of an offer of employment. ASIC has previously granted case-by-case basis for offers to contractors and casual employees, taking into account the past relationship and likely ongoing relationship between the parties, where a level of interdependence exists and obtaining an ownership interest in the issuer will enhance the relationship.

ASIC also proposes to provide limited relief for offers of certain financial products by listed companies to non-executive directors, subject to additional conditions.

Providing greater flexibility in the way employee incentive schemes can be structured to better reflect market practices (e.g. amending the requirements for trust, contribution and loan arrangements)

ASIC proposes to further facilitate employee incentive schemes that involve using third-party bodies to provide trustee and trust administration services for the purposes of operating an employee incentive scheme. This will occur by extending relief to cover offers of certain specific financial products that are held on trust and are allocated to specific participants and also to include underlying eligible products held in a pool for participants generally on an unallocated basis.

Expanding the types of situations where unlisted companies may offer employee incentive schemes

Currently the Class Order provides relief to unlisted companies, but only in relation to offers of options over fully paid shares.

ASIC is proposing to extend that relief to cover offers of ordinary shares for non-monetary consideration, by providing relief where those shares are valued at no more than $1,000 per offer, and various other conditions are satisfied. ASIC's rationale for this change is that this low amount involves only a relatively small financial decision and provides a proper balance between the risks of not providing disclosure required under the Act and the benefits of giving employees incentives and encouraging ownership interests by employees in their unlisted employer.

The proposed class order relief will also cover offers of options and performance rights by unlisted companies provided detailed conditions are satisfied.

AFS licensing and other relief

Under the Class Order, where an employee share scheme qualifies for disclosure relief, ASIC also provides relief for financial services provided as part of the scheme, on the basis that there are adequate employee protections in place.

ASIC proposes to extend its AFS licensing, managed investment scheme, hawking (offers made in the course of unsolicited meetings or telephone calls) and advertising relief to cover employee incentive schemes that qualify for disclosure relief under the proposed class order.

Reducing the administrative burden

ASIC also proposes to amend a number of the general conditions which must be met under the Class Order in order to entitle a company to be able to rely upon relief. For example, ASIC proposes to replace the current requirement to provide offer documents to ASIC, with the requirement that a company must simply notify ASIC within seven days of making an offer under an employee incentive scheme, and complete and submit the information specified in a designated form.

What should companies do?

ASIC has requested comments and submissions on the consultation paper and the draft regulatory guide by 31 January 2014. It is then expected that ASIC will release details of the final form of relief which it will make available and the finalised regulatory guide by May 2014.

Together with the consultation process being adopted by the Federal Government following the release of the discussion paper in September 2013, it seems likely that there will be substantive legal and regulatory changes made to encourage employee share ownership in Australia in the new year and potentially tax concessions offered to make employee incentive schemes more attractive and easier to implement for start-up companies.

Companies that are looking to implement a new employee incentive scheme, or make new offers under an existing employee incentive scheme, should keep up to date with these changes. We will keep you informed of all major changes as they are more fully developed and implemented.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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