ASIC Relief for Employee Incentive Schemes

On 1 October 2022 the new Corporations Act provisions came into effect streamlining the disclosure, licensing, advertising, anti-hawking and on-sale regulatory requirements for offers of shares, options or performance rights (ESS).

When the provisions were in draft form the legal profession, while broadly welcoming them, had raised certain operational concerns. In response on 29 September 2022, ASIC launched consultations on potential modifications to the new provisions. ASIC recognised that “strict compliance may unintentionally reduce the ability of entities to operate employee share schemes in this jurisdiction” and on 20 December 2022 made new legislative instruments modifying the Corporations Act to address some of these concerns.

Final date for Class Orders 14/1000 and 14/1001

For many years ASIC Class Orders 14/1000 (listed bodies) and 14/1001 (unlisted bodies) offered relief from the requirements of Corporations Act for offers of ESS made in compliance with them. These Class Orders were due to cease when the new streamlined provisions took effect on 1 October, but due to ASIC’s consultations on the outstanding concerns, the Class Orders were extended until January 2023. The Class Orders have been extended further until 1 March 2023 with offers made under them capable of acceptance only until 1 April 2023.

Secondary sales

A particular concern raised was that the new streamlined provisions did not address existing restrictions for on-sale of financial products issued without disclosure within 12 months of their issue.

First, section 1100ZD has been modified so that unquoted ESS interests may be sold to another ESS participant where the seller either acquired the ESS interest in connection with an employee share scheme or from another ESS participant: notional subsection 1100ZD(1). Second, there is a broader on-sale exemption for ESS interests quoted on a financial market if the body that issued the ESS interest did not have an on-sale purpose (see also ASIC Corporations (Sale Offers That Do Not Need Disclosure) Instrument 2016/80).

Valuations

There was some concern that unlisted ordinary shares were not able to be valued for ESS purposes using the method statement in Income Tax Assessment (Methods for Valuing Unlisted Shares) Approval 2015 (ESS 2015/1). ASIC has clarified that this is not the case. However, ASIC has now provided that ESS interests may be valued by an expert, where they are that are not ordinary shares issued by a company. This change will apply to many foreign company ESS interests.

Foreign Financial Information

ESS participants must be given financial information when the offer involves them paying for the ESS interest. Subparagraph 1100X(2)(c)(i) requires a balance sheet and P&L prepared in compliance with Australian accounting standards or IFRS. Foreign entities that do not prepare accounts using Australian accounting standards (eg entities that are not registered under Part 5B.2 of the Act) may now provide a balance sheet and profit and loss statement that uses the foreign accounting standard in its place of origin or in its principal place of business.

However, unless the foreign entity reasonably believes it is using US GAAP, it must provide:

(a) confirmation that there are no material differences between the foreign financial information and Australian accounting standards or IFRS; or

(b) a reconciliation of material differences between the foreign financial information and the information that would otherwise be required under Australian accounting standards or IFRS.

Other technical amendments

Contribution plans – salary sacrifice and loan schemes now fall within section 1100T dealing with contribution plans. Also, a note inserted indicates that contributions of more than one ESS participant may be held in the same trust account.

Issue Cap - offers made to participants in other jurisdictions and expired offers will not need to be included when calculating the issue cap.

Disclosure updates - the offeror only needs to provide ESS participants with an updated ESS offer document during the application period for the offer.

Time Limit

These ASIC instruments are intended to operate for 5 years.

ASIC Corporations (Employee share schemes) Instrument 2022/1021 (legislation.gov.au);

ASIC Corporations (Amendment) Instrument 2022/1022 (legislation.gov.au).