Requirements when implementing an ESS
You must be aware of the following when implementing an ESS:
- the provisions of the Corporations Act 2001External Link relating especially to offers of shares (in particular, sections 706, 708 and 710 – 716), including disclosure requirements and exemptions
- for listed companies, the relevant stock exchange listing rules (ASX listing rules)
- the company constitution
- the provisions of the Corporations Act restricting companies from dealing with their own shares
- taxation law issues, including income tax, capital gains tax, pay as you go withholding and fringe benefits tax
- the provisions of the Corporations Act relating to financial services regulation and the rules regulating financial advice (unless you have an exemption from this by using section 708 of the Corporations Act or Australian Securities & Investments Commission (ASIC) Class Order exemptions for ESS)
- other provisions of the Corporations Act relating to licensing, advertising, hawking, managed investment schemes and on-sale of financial products
- accounting standards
- privacy legislation.
For more information on employee incentive schemes and provisions of the Corporations Act 2001, see Regulatory Guide 49: Employee incentive schemesExternal Link.
Disclosure or prospectus requirements associated with
Where you make an ESS offer, a range of obligations under the Corporations Act may be triggered. This includes:
- The disclosure requirement
- Disclosure exemptions
- Disclosure documents
- Other requirements of the Corporations Act.
The disclosure requirement
The Corporations Act requires that if you make an ESS offer, you must also give the employee a disclosure document. This is unless:
- an exemption in that Act applies
- you are relying on the relief in the relevant ASIC Class order for listed or unlisted bodies.
The following ASIC Class orders apply to relevant offers made before 1 March 2023 and are only capable of acceptance until 1 April 2024:
- [ASIC CO 14/1000]: Employee incentive schemes: Listed bodiesExternal Link
- [ASIC CO 14/1001]: Employee incentive schemes: Unlisted bodiesExternal Link.
Division 1A of Part 7.12 of the Corporations Act took effect from October 2022 and provides regulatory relief to employee share schemes, which meet particular requirements.
Division 1A replaces and expands ASIC Class Order relief in relation to employee share schemes.
Disclosure exemptions
There are limited disclosure exemptions that may apply for offers of Options to employees under the Employee Option Plan, which include both (among others):
- offers to senior managers – see subsection 708(12) and the definition of 'senior manager' in section 9 of the Corporations Act
- small-scale offers – offers to up to 20 persons not exceeding $2 million (calculated by reference to the amount payable on both grant and exercise of the option) in any 12-month period (see subsections 708(1)–(7) for more detail).
Disclosure documents
A disclosure document is a term used to describe all regulated fundraising documents for the issue of securities.
All disclosure documents must be lodged with ASIC before an offer can be made under the ESS.
The simplest type of disclosure document that can be used to make an offer under an ESS is an offer information statement (OIS). A prospectus, which has a more comprehensive content requirement than an OIS, may also be used.
An OIS must include (among other things) an audited financial report prepared in accordance with the accounting standards, which covers both:
- a 12-month period
- a balance date that occurs within the last six months, before an offer is first made under the OIS.
A prospectus must contain all information that investors and their professional advisors would reasonably require to make an informed investment decision.
Among other things, it must explain the company's financial position, performance and prospects.
For more information on prospectuses, see ASIC Regulatory Guide 228: Prospectuses: Effective disclosure for retail investorsExternal Link.
Other requirements of the Corporations Act
The Corporations Act also contains the following provisions that may be relevant, depending on how your ESS is implemented:
- The requirement to hold an Australian financial services licence for the incidental provision of financial services (such as giving general advice, dealing in financial products or providing custodial or depository services) in connection with the ESS.
- The prohibition on advertising an offer or an intended offer, where that offer needs a disclosure document.
- The prohibition on the issue of options or shares arising out of unsolicited contact with investors – which is referred to as hawking.
- The requirement to register a managed investment scheme for an ESS that has a contribution plan.
- The restrictions on the on-sale of financial products issued without disclosure within 12 months of their issue.
If your offer is an 'eligible employee share scheme' (defined in section 9 of the Corporations Act) and is made using a disclosure document, there are some limited exemptions from these provisions.
If you are relying on exemptions, you are generally not required to comply with these provisions.
There are many legal and regulatory requirements to consider in implementing an employee share scheme (ESS).