Government consults on proposals to help navigate the ESS playground

This article was written by Emma Newnham and Joe Muraca.

Summary

The Government has acknowledged that the current regulatory framework for employee share schemes (ESSs) is complex and fragmented, and ultimately discourages some businesses from offering ESSs.

It's recently released consultation paper seeks feedback on proposals to simplify and broaden the current regime by:

consolidating statutory exemptions and ASIC class order relief;
increasing the $5,000 per employee per year limit for unlisted companies to $10,000;
extending the unlisted relief to cover contribution plans; and
allowing small companies to make ESS offers without publicly disclosing commercially sensitive financial information.

These proposals have been made as a result of stakeholder feedback over many years. If implemented they will move Australia further along the path towards a user friendly ESS regime. However even if these proposals are implemented, there will be further work to do to make the ESS regime more accessible and enable small businesses to more effectively compete with their international peers.

Background

The Government has given us plenty of time to collect our thoughts for this consultation, initially committing to consult on options to amend the disclosure requirements to make ESSs more user-friendly as part of the National Innovation and Science Agenda in 2015.

This consultation follows a number of other steps taken by the Government to create a more accessible ESS regime for start-ups, including:

tax concessions for ESS' of qualifying start-ups in 2015; and
a relaxation of the requirement for ESS disclosure documents of qualifying start-ups to be made publicly available (see our previous alert here), an exemption which has been "underutilised" since it was introduced in 2017.

Limitations of the current regulatory framework

The key ESS rules are found in the Corporations Act, multiple ASIC class orders and the tax legislation.

The focus of the consultation paper is on addressing three concerns:

the exemptions that facilitate ESSs are complex and fragmented;
some stakeholders consider the conditions of the ASIC class order relief to be overly restrictive; and
some stakeholders consider the disclosure obligations discourage small businesses^[1] from implementing ESSs because it may result in the public release of commercially sensitive information.

In our experience, unlisted companies find the ESS rules both difficult to navigate and inaccessible. In some cases, the conditions in ASIC's class order relief for unlisted companies have meant companies have had to seek individual relief from ASIC, with varying degrees of success. This further adds to the time and cost burden for companies seeking to implement an ESS.

There is of course a difficult balance to be reached between disclosure and investor protection on the one hand, and fostering innovation and employee ownership on the other. The latter is key for "new" economy businesses. This consultation is an opportunity for all businesses to tell Treasury what changes they would like to see to make the ESS regime user friendly and accessible.

Options for reform

The Government has proposed four options, aimed at simplifying the regulatory framework while maintaining the rationale behind the current relief:

Options for reform	Questions being asked
1. Consolidate the statutory exemptions from disclosure, licensing, advertising, anti-hawking, managed investment scheme and on-sale obligations under the Corporations Act and ASIC class order relief in [CO 14/1000] and [CO 14/1001] and simplifying the requirements of these exemptions	Do you support consolidating and simplifying the statutory exemptions and ASIC Class Order [CO 14/1001] in the Corporations Act? Does the complexity of the current regulatory framework for ESSs create significant difficulties for businesses looking to offer an ESS? Would there be significant benefits or risks for business in consolidating and simplifying the current regulatory regime? Would compliance be significantly easier if the obligations applying to ESSs were all contained in the Corporations Act? Are there significant advantages or disadvantages in using ASIC class orders as opposed to primary legislation to regulate ESSs? Are there any requirements or conditions of the ASIC class order that should be removed or amended as part of the consolidation? Should ASIC be given an additional power to determine that a company should not be permitted to rely on a statutory exemption for an ESS?
2. Increase the value limit of financial products that unlisted companies can offer in a 12 month period from $5,000 per employee to $10,000 per employee	Do you support increasing the offer cap per employee? What are the benefits or risks of increasing the employee offer cap? Is a $10,000 limit per employee per year appropriate or is a greater increase appropriate? Should senior managers (within the meaning of s9 of the Corporations Act) be excluded from this cap? Is the level of disclosure currently required by the ASIC class order for unlisted companies sufficient to address any risk associated with an increased employee cap? Is any additional disclosure or protection necessary or desirable? Are there any significant advantages or cost savings for business as a result of an increased cap per employee? Please provide details.
3. Expand the relief for unlisted companies to cover contribution plans, where an employee can make a monetary contribution to acquire eligible financial products through an ESS	Do you support contribution plans being able to be used to fund the acquisition of financial products for an ESS of unlisted companies? What are the benefits or risks of allowing unlisted companies to offer contribution plans as part of their ESS? Are any additional protections necessary for employees participating in contribution plans? For example, capping monetary contributions at $10,000 per employee per year or requiring an independent valuation where a contribution plan is offered or the $10,000 cap is exceeded. Please provide details. Are there any significant advantages or cost savings for business as a result of allowing contribution plans?
4. Allow small companies to make ESS offers under a lodged disclosure document without publicly disclosing commercially sensitive financial information, unless they are otherwise obligated to do so	Do you support expanding the types of ESS eligible for the exemption from public access to disclosure documents? What are the benefits or risks of expanding the types of ESS eligible for this exemption? Are there any other changes to the scope or availability of this exemption that are necessary or desirable? Please provide details.

Listed companies and other reforms

The proposed reforms are focused on small businesses, but the consultation paper also includes questions on possible reforms to assist listed companies and other reforms:

Options for reform

Questions being asked

5. Listed companies

Do you support simplifying and consolidating the relief for listed companies in the Corporations Act?
What are the potential benefits or risks of consolidating the relief for listed companies in the Corporations Act?
Are there any requirements or conditions of the ASIC class order that should be removed or expanded as part of the consolidation? If so, please explain why.
Are there any other barriers or costs for listed companies offering ESSs?

6. Other reforms

Are there any other regulatory barriers to small businesses offering ESSs?
Are there any other reforms to the regulatory framework for ESSs that would further facilitate or reduce costs for small businesses offering an ESS?

Submissions

Submissions are open until 30 April 2019.

We are preparing to lodge a submission on the paper and would appreciate your feedback.

[1] Other than some eligible start-ups (being unlisted companies that are no more than 10 years old and with annual revenue of less than $50m) who are already exempt from the public access requirement for disclosure documents lodged with ASIC: see our previous alert here.