The new regime came into effect on 1 October 2022 and serves to lower the regulatory burden on listed and unlisted companies when offering ESS interests. While these changes have reduced the regulatory burden and expanded the accessibility, entities making offers should review their current ESS terms and conditions and template offer letters to identify any changes that may be required to ensure compliance and to enable them to fully utilise the benefits of this new ESS regime.
What ESS offers are eligible for regulatory relief?
To be eligible for regulatory relief under the new regime, all ESS offers (including ESS offers which would otherwise not need disclosure) must be an offer:
- of eligible ESS interests;
- made to eligible participants; and
- expressed to be made under Part 7.12 Division 1A of the Corporations Act.
The new regime imposes additional obligations on entities who offer ESS interests which require payment from the participant. Stricter rules apply also apply to unlisted companies as opposed to listed companies.
Requirements at a glance
The following table sets out your compliance obligations.
| Offers which do not require payment | Offers which would otherwise not need disclosure | Offers which require payment | Offers which require payment | |
|---|---|---|---|---|
| Listed and Unlisted | Listed and Unlisted | Listed | Unlisted | |
| Eligible interest | ||||
| Eligible participants | ||||
| Expressed to be made under Part 7.12 Division 1A of the Corporations Act | ||||
| Compliant Offer document | ||||
| Supporting information | ||||
| Issue Cap | ||||
| Monetary Cap |
What if my offer is for no consideration?
If the offer is for no consideration, you will only need to comply with those items set out at (1) to (3). An offer for no consideration is an offer which requires no monetary payment from the employee to acquire the ESS interest.
Although you are not required to prepare an offer document for offers for no consideration, it is prudent to ensure there are ‘no surprises’ for the participant.
How do I prepare a compliant offer document?
If you offer an ESS interest to an employee which requires payment to acquire the interest you must provide a compliant offer document to the participant at least 14 days before the interest is acquired.
A compliant offer document must:
- include the terms of the offer or include a summary of the terms accompanied by a statement that, on request, the full terms will be provided by the participant;
- state the period in which the offer must be accepted;
- include the prescribed information contained in section 1100W of the Corporations Act; and
- include the prescribed risk and warning statements contained in section 1100W of the Corporations Act.
If you are an unlisted company, your offer document must also include:
- a statement that the ESS interests may not have any value and that the value of the ESS interests will depend on future events that may not occur; and
- if the ESS interest is in respect of shares that are not ordinary shares, a description of the rights attaching to those shares.
What supporting information must be provided by unlisted companies and when must it be provided?
The requirement to provide the participant additional supporting information only applies to offers made by unlisted companies which require payment from the participant to acquire the ESS interest.
The Supporting Documentation includes:
- financial information contained in a balance sheet and a profit and loss statement prepared in compliance with either local accounting standards or the international accounting standards (within the meaning of the Australian Securities and Investments Commission Act 2001), accompanied by a statement of whether the financial information has been audited;
- a valuation document relating to the options and plan shares offered which has been prepared using methodology which is consistent with a method approved by the Commissioner of Taxation under section 960-412 of the Income Tax Assessment Act 1997 (Cth) or another document permitted under section 1100X(3) of the Corporations Act; and
- a statement that the Company making the Offer is solvent.
Under the new regulations, no ESS interest can be acquired by the participant for monetary consideration until at least 14 days have passed since receiving the specified supporting documentation. This means that if you are offering an ESS interest which requires upfront payment, the Company must provide the supporting documents with the offer document. If the ESS interest does not require upfront payment but requires payment of an exercise price to acquire the interest, the supporting documentation must be provided 14 days before the option can become exercisable.
What is the issue cap and how do I calculate it?
The issue cap only applies to offers of ESS interests which require payment from the participant to acquire the ESS interest (such as the issue of options under an option plan where an exercise price is payable on exercise).
The issue cap limits the proportion of the share capital a body corporate can issue under an employee share scheme to ensure the offer is genuinely for attracting and retaining employees.
The offering entity must ensure that the sum of:
- the number of underlying shares offered by the Company; PLUS
- the number of Plan Shares that have, or could have been, issued under the Plan in the in the previous three years on a rolling basis from the date on which the relevant offer is made,
does not exceed the prescribed percentage of fully paid shares actually issued by the Company.
The applicable percentage is 5% for listed companies and 20% for unlisted companies.
The constitution of the offering entity may specify a higher (or lower) issue cap.
Offers where no payment is required by the participant to acquire the ESS or which are otherwise exempt do not need to comply with the issue cap. However, they are included in the calculation of the issue cap.
What is the monetary cap and how do I calculate it?
The monetary cap limits the amount of money that a participant can outlay to acquire ESS interests. It only applies to:
- offers which require payment to acquire the ESS interest; and
- offers made by unlisted companies.
This is an example of how to calculate the monetary cap and the carried forward cap for each participant.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |
|---|---|---|---|---|---|
| $30,000 + 70% of dividends + 70% of bonuses | $30,000 + 70% of dividends + 70% of bonuses + carried forward amount* from Y1 | $30,000 + 70% of dividends + 70% of bonuses + carried forward amount* from Y1 and Y2 | $30,000 + 70% of dividends + 70% of bonuses + carried forward amount* from Y1, Y2 and Y3 | $30,000 + 70% of dividends + 70% of bonuses + carried forward amount* from Y1, Y2, Y3 and Y4 | $30,000 + 70% of dividends + 70% of bonuses + carried forward amount* from Y2, Y3, Y4 and Y5** |
* The carried forward amount is the aggregate exercise price of unexercised options the participant had the right to exercise in the relevant year under their option plan (i.e. unexercised but vested options). The carried forward amount is capped at $30,000 per year up to a maximum cap of $150,000 accrued over a 5-year period. The dividends and cash bonuses component of the cap cannot accrue.
** The 5-year accrual period is a rolling-period i.e. the carried forward amounts for the previous 4 years will be available. As you can see in the diagram, the carried forward cap in year 6 will include the carried forward amounts from years 2-5.
The monetary cap applies to the total amount of cash outlaid by a participant to acquire interests under any offer made to that participant under the ESS. Therefore, entities making offers must carefully prepare and monitor their offers to ensure that the total exercise price of options exercisable across all offers made to an individual participant will not exceed $30,000 in any given year (plus any available carried forward amount).
What if I am a foreign company making offers to Australian employees?
The new regulations have a geographical application and apply to all offers which are received in Australia. This means if you are a foreign entity making an offer to an Australian employee, you must comply with the regulatory requirements.
What if I don’t comply?
If you fail to comply with the new regime you will not be able to rely on the regulatory relief. This means that you will need to comply with the regulations concerning making offers of securities, such as preparing a compliant disclosure document and complying with the financial licensing provisions and the restrictions on the hawking and advertising of securities.
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