Changes proposed to simplify the employee share scheme framework
In November last year, the Federal Government announced an intention to simplify the current regulatory framework around the offering of employee share schemes (ESS), aimed at reducing the time and cost burden for businesses (particularly small businesses) to offer an ESS.
An ESS can provide many benefits to a business and its employees, for example by encouraging the retention and participation of staff in the business by giving them an interest in the business itself and enabling the employee to participate in the success of the business. In addition, there can be tax advantages for participation in an ESS, in addition to any economic benefits derived from ownership interest in a successful company. However, it has been observed that the current ESS framework is complex and fragmented, which may discourage businesses from offering an ESS to its employees.
Treasury has released a Consultation Paper seeking feedback on a number of proposed amendments to the ESS framework that aim to simplify the framework by:
The closing date for submissions in response to the Consultation Paper is 30 April 2019.
Below, we step briefly though each of the proposed changes in turn.
Offers made under an ESS can potentially trigger a range of obligations under the Corporations Act, including requirements in relation to disclosure, financial services licensing, advertising, hawking, managed investment schemes and the on-sale of financial products.
Currently there are exemptions for certain ‘eligible’ ESS from many obligations. However, these exemptions are complex, and are fragmented across the Corporations Act and ASIC class order relief (principally [CO 14/1000] for listed companies and [CO 14/001] for unlisted companies). Further, the definition of applicable ESS to which the exemptions apply is not consistent across the Corporations Act and the class orders, resulting in legal complexity.
The Consultation Paper proposes to simplify the existing framework, by:
It is proposed that ASIC will continue to have the same power to grant individual relief from the obligations under the Corporations Act that it has currently.
Currently, unlisted companies seeking to make ESS offers without a disclosure document, in reliance on ASIC class order relief, can only make offers up to $5,000 in value (per employee) over a 12 month period.
An option suggested under the Consultation Paper is to increase this limit to $10,000 per employee, to increase the ability of such companies to offer an ESS.
Even where there is no monetary consideration paid for shares, raising this cap may increase the potential risk for employees participating in an ESS as the shares might otherwise form part of a wider remuneration package. To address this, the Consultation Paper suggests that the current condition for an offering company to provide a minimum level of disclosure to employees be retained, or modified as appropriate.
Some ESS’s may include a contribution plan, where an employee makes a monetary contribution that is then used to acquire financial products offered under the scheme. Currently, in order for an unlisted company to make an ESS offer without a disclosure document in reliance on ASIC class order relief, they cannot utilise contribution plans in connection with such an offers.
The Consultation Paper suggests allowing contributions plans to be offered to employees to help them participate in an ESS of unlisted companies. Given this will involve a monetary contribution by an employee, additional protections may be warranted, and the following have been suggested:
While there is an existing exemption from the requirement for disclosure documents lodged with ASIC to be made publicly available, this is currently only available for certain eligible ESS offers made by ‘start-ups’ - being unlisted companies that are no more than 10 years old and with annual revenue of less than $50 million.
As such, unless a small business is able to access the existing exemptions from the requirement to issue disclosure materials (as referenced above), when offering financial products under an ESS, the business is subject to disclosure obligations. This can discourage small businesses from implementing an ESS, because it may result in the public release of commercially sensitive information.
The Government is suggesting expanding the current exemption to public disclosure, so that it applies to a broader range of companies (being small companies, not just start-ups) and a broader range of ESS offers. This would enable small businesses offering an ESS to make offers under a disclosure document, without the requirement to make that disclosure document publicly available, although the disclosure materials would still need to be lodged with ASIC. The proposal is that this expanded exemption would only apply to small companies, as large companies generally already have financial reporting obligations under the Corporations Act requiring them to lodge audited financial reports with ASIC which are made available to the public in any event.
As this is a consultation paper only, no changes to the current ESS framework will occur right away. However, if these proposed changes are ultimately made, the simplification and expansion of the ESS framework will likely lead to more small companies offering equity participation through employee incentive schemes to more of their employees.
If you would like assistance with an employee share scheme, or more generally in relation to your corporate matters, please contact HopgoodGanim Lawyers’ Corporate Advisory and Governance team.