Background

As noted in our September 2021 alert, the key exemptions for ESS offers are currently contained in ASIC Class Orders 14/1000 and 14/1001. These exemptions enable companies to make ESS offers without needing to prepare a prospectus (or similar document) or hold an Australian financial services licence (AFSL).

The conditions in Class Order 14/1000 are typically easy to satisfy, and the exemption has proved a popular way for listed (i.e., publicly-traded) companies, both Australian and foreign, to operate employee equity plans in Australia.  In contrast, Class Order 14/1001, which applies to unlisted (i.e., privately-held) companies, contains a number of restrictive conditions which have made it much more difficult to use.  In particular, Class Order 14/1001 can only be used where the total value of awards granted to any one employee in any 12-month period is no more than AUD 5,000.

The new law inserts exemptions into the Corporations Act 2001 (Cth) (CA) which are analogous to the existing Class Orders.  However the new law, like the exposure draft legislation before it, departs from the Class Orders in a number of ways which will likely make it more attractive, at least for companies that are offering awards for no monetary consideration.  For awards that require monetary payment, the picture is less clear-cut - particularly where the issuing company is unlisted.  The new measures contain some key advantages over the two Class Orders, but they also introduce some additional disclosure requirements and sources of potential liability which may be concerning to some companies.

Key Takeaways

The new law introduces a number of key changes to the regulation of ESS offers.  These include:

• Removing the 3-month listing requirement

Companies don't need to be publicly-traded on a major stock exchange for 3 months in order to be treated as "listed" for the purposes of the new rules.  This contrasts with Class Order 14/1000, which is only available to companies that have been listed (without interruption) for at least 3 months.

• Distinguishing between ESS offers that do and do not require monetary payment

ESS offers by listed or unlisted companies that do not require payment (whether upon grant or at exercise/vesting) can be made without the need for an AFSL and without any prescribed form of disclosure, provided that the offers state that they are being made under the new rules.

In contrast, ESS offers which require monetary payment (whether upon grant or upon exercise/vesting of the awards and issue of the underlying shares) must be accompanied by an "ESS offer document" and must comply with an issue cap (generally 5% for a listed company and 20% for an unlisted company, although these limits can be raised by amending the company's constitution).

• Raising the monetary cap for ESS offers made by unlisted companies

ESS offers made by unlisted companies that require monetary payment will need to comply with a monetary cap, the base limit being AUD 30,000 per employee in any 12-month period.

• Share purchase and loan plans offered by unlisted companies

Subject to meeting the relevant requirements, unlisted companies will be able to operate share purchase plans and loan plans.  Again, this is in contrast to Class Order 14/1001, which specifically precludes these possibilities.  However, in the case of unlisted companies, the exemption for loan plans is only available if plan participants are not shareholders of the relevant company.

• Removing the notice requirement

There is no longer any requirement to file a "notice of reliance" with ASIC.  However, ASIC can require companies to provide ASIC with their ESS offer documents, together with any other information that ASIC deems relevant in determining whether the new rules have been complied with.

• Retaining other statutory exemptions

The existing statutory exemptions (such as the senior manager and the 20-in-12 exemptions for offers of securities) will remain available for offers that are not covered by the new rules.  However, as noted below, there is some uncertainty regarding the interaction of the new rules with the 20-in-12 exemption.

The reforms also seek to address a number of shortcomings in the original exposure draft legislation (discussed in our September 2021 client alert), including the regulation of offers to independent contractors, the requirement for foreign company accounts, and the regulation of options and "incentive rights" (i.e., RSUs and phantom awards) offered by listed companies.

Click here to read the full alert.