Employee Incentive Schemes: Update on ASIC relief

On 31 October 2014, ASIC updated its relief relating to employee incentive schemes.   

The introduction of these Class Orders represents, in some respects, a marked change in ASIC’s position in relation to such schemes.

The increased flexibility and broadened scope of the relief will likely lead to more listed and unlisted companies offering equity participation through employee incentive schemes to more of their employees.

In this article, Nicole Radice summarises the key changes to ASIC relief in relation to employee incentive schemes arising as a result of the introduction of the Class Orders.

Listed Bodies – Class Order 14/1000

For listed bodies, the key changes to ASIC relief in relation to offers under employee incentive schemes (EIS) are:

1. Widening of who can participate in the offer – contractors, casual employees and prospective participants who meet the criteria may now be offered financial products under an EIS by a listed company. ASIC has also clarified that non-executive directors may participate. This is in addition to executive directors and full-time and part-time employees.
2. Widening of the financial products that may be offered – the quotation requirement for financial products offered under the EIS has been reduced to the preceding three months (as opposed to 12 months) although trading must not have been suspended in those products for more than five days in the last 12 months (as opposed to three days). In addition, offers may now be made in relation to:
   1. Depository interests including CHESS Depositary Interests and American Depositary Interests;
   2. Quoted interests in managed investment schemes;
   3. Quoted stapled securities; and
   4. Options and incentive rights over the above.
3. Greater flexibility in the structuring of the offer – ASIC has offered greater flexibility in terms of offering financial products under an EIS through a trust structure (underlying products may now be held on an allocated or unallocated basis), contribution plans and certain types of loan arrangements.  However, interest must not be payable on any loan arrangements.
4. Issue limit – the five per cent issue limit formula has been simplified and now takes into account the current offer and offers in the last three years (as opposed to five years).
5. Additional disclosure – ASIC has imposed a requirement to disclose general information about the risks of acquiring financial products under the relevant EIS.  ASIC can also request copies of EIS documents.
6. ASIC lodgement – ASIC now only requires an initial lodgement of a ‘reliance notice’ (ASIC Form CF08) within one month after the first offers are made under an EIS, as opposed to the previous requirement of having to lodge offer documents with ASIC within seven days of each offer being made.

Unlisted Bodies – Class Order 14/1001

For unlisted bodies, the key changes are as follows:

1. Widening of who can make an offer – an offer under an EIS can be made by an unlisted body and a wholly owned subsidiary of that body.
2. Widening of who can participate – contractors, casual employees and prospective participants who meet the criteria may now be offered financial products under an EIS by an unlisted body. This is in addition to executive directors and full-time and part-time employees.
3. Widening of the classes of financial products that may be offered – in addition to options, an unlisted body may now issue shares and performance rights under an EIS, subject to the following restrictions:
   1. offers of all financial products must not be valued by the directors at, in aggregate, more than $5,000 per participant per year. The valuation methodology is to be disclosed in the offer document;
   2. shares must not be issued for more than nominal consideration; and
   3. in relation to an offer of options or performance rights, payment of more than nominal consideration on exercise or vesting of underlying shares is only permitted where:
      1. shares in the unlisted body have become quoted for at least three months without suspension for more than five days; or
      2. a current valuation document (i.e. a current prospectus, an Independent Expert’s Report or an agreement with a third party on arms length basis) is provided.
4. Increased issue limit – the issue limit has been increased from five per cent. An unlisted body may now offer up to 20 per cent of its issued capital under an EIS, calculated by aggregating the current offer and any other offers by that body under an EIS in the last three years. 
5. Additional disclosure requirements – ASIC has imposed a requirement to include in the offer document a warning about liquidity and realisation value on the front page, a directors’ solvency resolution, a directors’ valuation resolution and the body’s financial statements. In addition, the entity must disclose general information about the risks of acquiring financial products under the relevant EIS.
6. Greater flexibility in the structuring of the offer – offers may now be made by an unlisted body through a trust structure. Offers may not be made under contribution plans and loan arrangements. 
7. ASIC lodgement – ASIC now only requires an initial lodgement of a ‘reliance notice’ (ASIC Form CF08) within one month after the first offers are made under an EIS, as opposed to the previous requirement of having to lodge offer documents with ASIC within seven days of each offer being made.

A change for better or worse?

ASIC’s revision of the relief available to listed bodies represents a significant step in the regulation of employee incentive schemes. Although additional disclosure requirements have been imposed, in general, the benefits and broadened scope of Class Order 14/1000 appear to outweigh the inconvenience of those obligations. 

In terms of unlisted bodies, the key changes may mean that more ‘start up companies’ are likely to be able to take advantage of ASIC relief in relation to offers under employee incentive schemes. However, companies should be aware that the relief provided to unlisted bodies does attract certain obligations, in particular in relation to disclosure.

For this reason, unlisted bodies may find it more convenient to seek case-by-case exemptions from ASIC or rely on the disclosure exemptions in the Corporations Act (e.g. small scale offers, offers to senior managers and offers to sophisticated investors). ASIC has provided a new separate Class Order 14/978 that enables employers to continue to make personal offers under the Corporations Act notwithstanding their reliance on Class Order 14/1000 and Class Order 14/1001.

How to make use of the updated relief

ASIC has included transition provisions which provide that if a body has been relying on the relief under Class Order 03/184 and it simply wishes to continue to make offers as it has done pursuant to that relief, there is no need to amend the body’s EIS documents.

However, if a body wishes to rely on the new relief, its EIS documents will need to be updated. New schemes that come into existence on or after the commencement of the Class Orders will only be eligible for the updated relief and therefore will need documents that comply with the new requirements.

For more information on Corporate Advisory and Governance matters, please contact HopgoodGanim Lawyers' Corporate Advisory and Governance team.