This article was written by Joseph Muraca and Emma Newnham.
As part of its National Innovation and Science Agenda, the Australian Government acknowledged that current disclosure requirements can discourage startups from implementing an ESS, because it can be costly and result in the release of commercially sensitive information. Along with a range of other measures to encourage startups and innovation, the Government committed to limiting the requirement for disclosure documents for ESS offers to be made available to the public. The measure intended to give effect to this commitment was introduced into parliament as part of the Treasury Laws Amendment (Measures No.1) Bill 2016 on 1 December 2016.
This is a small step in a larger process for ESSs. The Australian Government also committed to consulting with industry on other options to make ESS more user-friendly. Submissions on a consultation paper released by Treasury closed on Wednesday 7 December 2016. Treasury has said the information obtained through the consultation process will inform the Government's future approach to the treatment of ESS.
Commentators have been agitating for change in this area for many years. Public calls have been made for a variety of reforms – such as increasing the small scale investor thresholds, removing the $5,000 limit in the ASIC Class Order relief for unlisted companies, and clarifying the application of the "no consideration" exemption in the Corporations Act.
These changes, if introduced, would be more substantive and would allow Australian companies to more effectively compete with their international peers.
How would the proposed measure work?
Unless an exemption applies, ESS disclosure documents, like most other disclosure documents, must be lodged with ASIC and made available for public inspection under sections 718 and 1274 of the Corporations Act.
The Bill amends section 1274 of the Corporations Act so that ESS disclosure documents do not need to be made publicly available if:
- the offer is of an ESS interest under an ESS;
- the disclosure document states that ESS interests will be made available only to employees, directors and independent contracts of the issuing company or a subsidiary, and relate only to ordinary shares;
- none of the equity interests of the company issuing the ESS interests or the companies in its group (issuer group companies)are listed for quotation in the official list of an approved stock exchange at the end of the issuing company's most recent income year before the year in which the disclosure document was lodged with ASIC (pre-lodgement year);
- the issuer group companies were incorporated less than 10 years before the end of the pre-lodgement year; and
- the issuing company has an aggregated turnover not exceeding $50 million for the pre-lodgement year.
These conditions are broadly similar to those that need to be satisfied to qualify for the ESS start-up concession in section 83A-33 of the Income Tax Assessment Act 1997 (ITAA 1997)(discussed in more detail in our previous alert).
What ESSs does the Bill apply to?
The Bill adopts the meanings of ESS interest and ESS in the ITAA 1997, rather than the existing (generally broader) definition of ESS in section 9 of the Corporations Act. The explanatory memorandum to the Bill states that the differences between the definitions are subtle and in many cases, will not have any practical effect. However it is important to note that the ITAA 1997 definition of ESS, unlike the Corporations Act definition, does not extend to situations where the interests are provided "for the benefit" of employees, nor to interests relating to shares in a holding company.
To qualify for the exemption from disclosure:
- the ESS interests must only be made available to employees, directors and independent contractors of the company or its subsidiary; and
- the ESS interests must only relate to ordinary shares (this includes options to purchase ordinary shares, but does not include options to purchase non-voting or preference shares).
Could the ESS disclosure document still be made available?
The Explanatory Memorandum notes that the amendments only alter the public's right to access the documents under section 1274 of the Corporations Act. The document, or information contained in it, may still be made available under other laws of the Commonwealth, such as freedom of information legislation.
The Bill was introduced to the Senate on 14 February 2017. If passed, the amendments will apply to initial ESS disclosure documents and replacement documents lodged with ASIC following the day after the Act receives royal assent.