Imminent Changes to ESS rules

From 1 October 2022, amendments to the Corporations Act 2001 (Cth) (Act) will come into effect which introduce a new regime for disclosure and licensing relief for offers made under an employee share scheme (ESS). These amendments will replace the existing regime for ESSs provided under ASIC Class Orders CO 14/1000 (for listed entities) and 14/1001 (for unlisted entities) (Class Orders), which are to be retired effective 1 October 2022.

The new regime provides for minimal disclosure requirements for entities that wish to offer ESS interests where no payment is required to participate (such as performance rights). For ESS interests that require monetary consideration (for example, for an acquisition of shares, or the acquisition and exercise of options, for cash) there are several changes which listed and unlisted entities must be aware of prior to making an ESS offer.

As a result of the changes, we are encouraging companies to review their existing ESS plans and associated offer documentation to ensure they can rely on the various disclosure and licensing relief available under the new regime. Where updates are required, ASX listed entities may also need to seek shareholder approval to amend their ESS plans so that securities issued under the amended plan do not form part of their 15% placement capacity.

A summary of some of the key changes is set out below.

Participant eligibility expanded

Under the new regime, eligibility is extended to directors, all employees and any service providers (with no minimum requirement of hours served). In addition, eligible participants can nominate certain “related persons” (such as their spouse, parent, child or sibling or a company controlled by any of them) to receive ESS interests.  Under the Class Orders, ESS relief was only available for issues to directors, full time and part time employees and casual employees/contractors that were 40% or more full time equivalent.

Monetary cap increased

Under the new rules, for an unlisted company the monetary cap per participant per year has been increased to a base limit of $30,000, plus an additional 70% of any dividends and 70% of any cash bonuses received in that year.  The previous cap for an unlisted company was $5,000 per participant per year.  No dollar amount monetary cap applies to listed companies.

Issue cap relaxed

Under the new rules, there is no cap on issues made for no monetary consideration. The 5% (listed) and 20% (unlisted) caps under the Class Orders (which applied irrespective of whether monetary consideration was required) will now apply only to issues made where payment is required to participate.  In addition, under the new rules, it is possible for a company to specify a higher limit than the above in its constitution.

Contribution and loan plans available for unlisted companies

Under the new rules, unlisted companies can now operate share contribution plans and loan plans. Previously, unlisted companies and their wholly-owned subsidiaries were specifically prohibited from making share contribution plans and loan plans available.

3 month quotation and suspension requirements for listed entities removed

The new regime now permits a company to offer ESS interests without any minimum quotation period, or any requirements with respect to suspension of trading in the company’s shares. Previously, the relevant Class Order required that a listed company’s shares be quoted on an eligible financial market for 3 months and that the shares had not been suspended for more than 5 days over the previous 12 months.

Different disclosure requirements for ESS offers with monetary consideration

The Class Orders did not distinguish between offers for monetary consideration and those without, with the same disclosure requirements for both types of offers.

Under the new rules, offers made for no monetary consideration do not have any specific requirements, other than the need for a statement that the offer is made pursuant to Division 1A of Part 7.12 of the Act. In the case of offers made for monetary consideration, an offer document is required (with specific disclosure requirements) and participants cannot acquire their ESS interests until 14 days after receiving the necessary disclosure from the company.

No on-sale relief for listed entities

Although the Class Orders previously provided on-sale relief for the sale of ESS interests, the new rules do not set out any equivalent exemption. Accordingly, listed entities will need to issue a cleansing notice to ensure that any shares issued (including from the exercise of options and performance rights) may be on-sold within 12 months of issue.  This has obvious implications for listed entities, and it may be that ASIC will issue class order relief in relation to the new regime to allow such onsale without a cleansing notice, consistent with the relevant relief in ASIC CO 14/1000.

Section 708 exemptions remain available

The various exemptions available under section 708 of the Act (such as the senior manager, professional and sophisticated investor and the 20/12/$2 million exceptions) remain available for offers not covered by the new rules. However, in the case of offers made in reliance on the 20/12/$2 million exception, entities will need to comply with specific requirements in the case of offers which involve a trust, contribution plan or loan arrangement.

Criminal liability now possible for misleading or deceptive disclosure

There are several new offences created under the Act in relation to the new regime, including misleading or deceptive statements/omissions and misuse of participants’ money being held. In addition, regulatory relief can be revoked if certain requirements of the new regime are not met.

Next steps

Please contact us if you would like assistance in reviewing your existing ESS plans and associated offer documentation to ensure that you can rely on the various disclosure and licensing relief available under the new regime.

David Woodford