On 1 October 2022, Schedule 4 of the Treasury Laws Amendment (Cost of Living Support and Other Measures) Act 2022 (Cth) (New ESS Regime) came into force. The New ESS Regime is designed to make it easier for businesses to offer employee share schemes (ESS) to their employees and to simplify the regulatory regime.
The previous position
ESS offers trigger a range of obligations under the Corporations Act 2001 (Cth) (Corporations Act), including in relation to disclosure, financial services licensing, advertising, hawking, the on-sale of financial products and design and distribution requirements.
The Corporations Act provides exceptions from certain of these obligations for ESS offers and ASIC also provides relief from these obligations for certain ESS offers through class orders (ASIC CO 14/1000 for listed entities and ASIC CO 14/1001 for unlisted entities) (Class Order Relief).
The New ESS Regime
Relief under the New ESS Regime
The New ESS Regime is intended to replace the Class Order Relief and will offer the same relief to listed and unlisted entities.
However, the scope of on-sale relief has been limited due to a drafting oversight (which is in the process of being rectified by ASIC). ASIC expects to provide this ‘fix’ by the end of this year for listed entities, which means the Class Order Relief will continue to be available until the end of this year.
The New ESS Regime also includes new relief from design and distribution obligations contained in Pt 7.8A of the Corporations Act.
Offers of ESS interests ‘for free’ are easier to make
Under the New ESS Regime, where a participant is not required to pay monetary consideration to participate in an ESS, there are far fewer conditions required to be satisfied to benefit from the relief.
Put simply, the offer document needs to state that the offer is being made under the relevant division of the Corporations Act. Additionally, new requirements apply where an incentive plan uses a trust so some updates to the trust deed may be required.
Offers of ESS interests requiring participants to pay monetary consideration still complicated
Where a participant is required to make a monetary payment under an ESS offer, more conditions need to be satisfied. These conditions are generally consistent with the requirements under the previous Class Order Relief.
Disclosure
Disclosure requirements are broadly the same as those under the previous Class Order Relief. Unlisted entities are also required to provide financial and valuation information if payment is required from the participant. The ESS award cannot be granted until at least 14 days after disclosure is provided.
There is also a new liability regime applying to offer documents prepared to satisfy conditions under the New ESS Regime for offers which require participants to pay monetary consideration. This includes a requirement for directors to notify participants if they become aware of any misleading or materially incorrect information in the offer documents and gives participants a right of recovery against directors for loss arising from misleading statements in the offer documents. However, a ‘due diligence’ defence similar to that available for disclosure documents is also available to directors.
Issue Cap
An entity can only rely on the New ESS Regime if the issue of the securities being offered will not cause it to breach its Issue Cap. Broadly, an Issue Cap will be breached where the issue of those securities, combined with all other securities issued under an ESS in the preceding 3 years, exceeds:
- 5% of the entity’s share capital (in the case of a listed entity) or
- 20% of the entity’s share capital (in the case of an unlisted entity).
However, the New ESS Regime allows entities to set a higher Issue Cap in their constitutions.
Monetary Cap
A Monetary Cap continues to apply to unlisted entities but has been expanded from the previous Class Order Relief. The Monetary Cap allows a participant to outlay up to a maximum of $30,000 on offers over a 12-month period, plus an additional 70% of any dividends and 70% of cash bonuses received in that year.
Comprehensive relief when relying on existing disclosure exceptions
The New ESS Regime provides comprehensive relief to an entity relying on the existing senior manager or sophisticated investor exceptions under the Corporations Act, without the need to do anything else. Similar rules apply for the small-scale offering exception, although some additional conditions need to be complied with.
Things for directors to consider
- For listed entities, it is best to continue to rely on the Class Order Relief until the on-sale relief issue under the New ESS Regime is fixed.
- It is also important for directors to consider the structure of ESS offers in order to potentially avoid the additional conditions/complexity where monetary consideration is involved.
- Entities utilising trusts should consider amendments to their trust deeds in line with requirements of the New ESS Regime.
- Directors should consider the way in which offer documents are prepared and whether disclosure can be simplified where ESS offers are made ‘for free’.
- If an ESS offer requires payment from participants, directors should be mindful of the new liability regime which applies to directors of the entity offering the ESS awards.
