The Australian Securities & Investments Commission (ASIC) Class Order [CO 03/184] (CO 03/184) which previously granted exemptions for employee incentive schemes from certain disclosure, licensing and other requirements under the Corporations Act 2001 (Cth) (Act), has now been discontinued and replaced with:
- for listed bodies, ASIC Class Order [CO 14/1000] (CO 14/1000); and
- for unlisted bodies, ASIC Class Order [CO 14/1001] (CO 14/1001) (together, the New Class Orders).
Problems identified
In November 2013, ASIC proposed various amendments to CO 03/184 in a consultation paper. In its review, ASIC identified a number of areas where CO 03/184 could be improved, including:
- CO 03/184 didn’t adequately deal with the broader range of incentive schemes that employers are seeking to offer; and
- there was uncertainty about the operation of some aspects of CO 03/184, such as whether incentive rights could qualify as zero priced options.
Scope of New Class Orders
ASIC have sought to make it easier for both listed bodies and unlisted bodies to offer employee incentive schemes to their employees by expanding:
- the classes of persons who can make offers in relation to employee incentive schemes;
- the classes of persons to whom employee incentive scheme offers can be made;
- the classes of financial products that can be offered; and
- the specific structures that can be used under the relief.
1. Who can make offers?
The New Class Orders continue to apply to listed and unlisted bodies (and now also apply to wholly owned subsidiaries of an unlisted body). However, the class of persons to whom offers can be made and the type of securities that can be offered has been expanded.
2. Who can receive offers?
The New Class Orders have broadened the range of persons covered by ASIC’s relief to include:
- employees (full-time or part-time, including executive directors);
- non-executive directors;
- contractors and casual employees (where they have worked or are expected to work the pro-rata equivalent of at least 40% of a comparable full-time position); and
- prospective employees (provided that the offer under an employee incentive scheme can only be accepted if the employment offer is also accepted).
3. What financial products can be offered?
Listed bodies
ASIC’s previous relief applied to offers for the issue or sale of fully paid shares in the issuer, options for the issue or transfer of those shares and units in those shares and stapled securities.
ASIC expressed the view in its consultation paper that many of the financial products offered by bodies under employee incentive schemes would not fall within the exemptions available under CO 03/184.
ASIC has now broadened the financial products that can be offered by a listed body (or associated body corporate) to include:
- beneficial (depository) interests quoted on an eligible financial market;
- ASX-quoted managed investment schemes;
- ASX-quoted stapled securities; and
- options and incentive rights over these products.
Despite this expansion of financial products, debt securities and partly paid securities are still not covered by CO 14/1000.
Unlisted bodies
The scope of financial products that can be offered by unlisted bodies and their wholly owned subsidiaries when relying on ASIC’s relief has also been expanded by CO 14/1001.
CO 03/184 provided disclosure relief for offers of options over fully paid shares in an unlisted body under an employee incentive scheme where the options could not be exercised until a prospectus was available. CO 14/1001 now provides that unlisted bodies or a wholly owned subsidiary of an unlisted body may make offers of the following eligible products when relying on ASIC’s relief:
- fully paid voting shares;
- a unit in a fully paid voting share;
- an option to acquire, by way of issue or transfer, a fully paid voting share; and
- an incentive right granted in relation to a fully paid voting share.
The relevant shares that are offered, or that underlie the options or performance rights offered, must be voting ordinary shares. This is because ASIC have taken the view that ordinary voting shares are easier to value and they are the most common and easily understood class of share.
4. What structures can be used?
Trusts
ASIC have extended its exemption in relation to trusts by, amongst other things, permitting products to be held on trust in a pool for participants on an unallocated basis, where certain operating conditions are met.
Contribution Plans and loans
CO 14/1000 continues to permit the use of contribution plans which can now be used in respect of the broader range of financial products detailed in paragraph 3. However, the relief does not extend to contribution plans involving the offer of options or incentive rights. In addition, CO 14/1000 allows contributions to be made from pre-tax or post-tax salary.
CO 14/1000 permits the use of loans to fund participation in employee incentive schemes. However, the loan must be:
- interest and fee free; and
- either on a non-recourse or limited recourse basis.
Relief is not available to unlisted bodies that use contribution plans or loans in connection with an employee incentive scheme.
5. What conditions will apply?
Listed bodies
The period of quotation and suspension, as well as the cap on the number of eligible products that can be offered in reliance of ASIC’s relief, has been relaxed:
| Relief under [CO03/184] | New relief under [CO14/1000] | |
| Quotation Period | 12 months | 3 months |
| Suspension Period | 2 days | 5 days |
| 5% offer limit based on current offer and offers over | 5 years | 3 years |
Unlisted bodies
In order for unlisted bodies to rely on ASIC’s relief, CO 14/1001 contains the following conditions:
- like listed bodies, a cap is imposed on the number of eligible products that can be issued in reliance of CO 14/1001, which is set at 20% (which was previously 5% under CO 03/184);
- offers for fully paid voting shares or units in those shares can only be made for nominal consideration;
- options and performance rights can be offered on terms that require more than nominal monetary consideration where certain conditions are met; and
- the value of all offers to any eligible participant of eligible offers in any 12 month period must not be greater than $5,000.
6. Notification requirements
ASIC previously required the body relying on the relief to lodge the offer documents with ASIC following each offer under an employee incentive scheme. However, the New Class Orders have simplified the notification burden for bodies making offers under an employee incentive scheme.
The New Class Orders now provide that bodies relying on the relief need only notify ASIC and lodge the offer documents before, or within 1 month after first reliance in relation to a particular employee incentive scheme.
7. Transitional arrangements
The New Class Orders also provide transitional relief so that bodies relying on CO 03/184 will continue to operate their existing employee incentive schemes with equivalent relief. However, ASIC must be notified in accordance with the New Class Orders in the event that subsequent offers are made under existing employee share schemes.
8. Private rulings
As with CO 03/184, bodies can apply to ASIC for case-by case relief, but ASIC have indicated that they are unlikely to provide relief beyond the scope of the New Class Orders. It should be remembered that any relief offered by the New Class Orders in is addition to the exemptions available under section 708 of the Act.
Conclusion
The New Class Orders provide greater flexibility in the way employee incentive schemes can be structured. The amended regime enables bodies to offer a wider range of financial products to a wider range of participants, and also clarifies certain areas of uncertainty under CO 03/384.
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