House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Josh Frydenberg MP)

Chapter 4: Employee Share Schemes

Outline of chapter

4.1 Schedule 4 to the main Bill introduces amendments make it easier for businesses to create employee share schemes.

4.2 References in this Chapter of this Explanatory Memorandum to 'the Act' are to the Corporations Act 2001.

Context of amendments

4.3 An employee share scheme is an arrangement put in place by a business to reward people who contribute to the business, namely directors, employees and service providers (referred to as 'participants'), with shares or other interests in the business in exchange for their labour.

4.4 Employee share schemes are often used by start-ups and cash poor businesses to attract employees when the business would be unable to compete with the salary and wages offered by larger and more established businesses.

4.5 Participants are generally offered the ability to join an employee share scheme for a business when they start their employment with the business or reach a new level of seniority within the business.

4.6 Employee share schemes come in many different forms. Employee share schemes can:

•

be offered in addition to salary and wages;

•

be offered to all or only certain groups of people participating in the business (such as senior managers and directors);

•

be in shares or other interests in the business (such as options or units in a trust);

•

involve trust arrangements where a trustee holds the shares on behalf of the participants; and

•

require the participants to make payments or take out loans to participate in the scheme.

4.7 Offers under employee share schemes can take many different forms. Offers can:

•

be created by separate offer rounds where a business offers interests to participants, with a deadline for those participants to accept the offer; or

•

be permanently open to allow people who participate in the business to join the scheme at any time.

4.8 The Act contains a variety of rules for businesses which issue financial products and securities. These rules include a requirement to obtain an Australian financial services licence and restrictions on hawking and advertising and disclosure requirements.

4.9 Financial products and securities offered as a part of certain employee share schemes are excluded from some of these requirements under the Act.

4.10 Further exclusions are currently made in ASIC class orders CO 14/1000 and CO 14/1001. Class Order 14/1000 applies to listed bodies corporate and listed registered schemes and Class Order 14/1001 applies to unlisted bodies corporate.

4.11 The Government is committed to reducing red tape for business, supporting job creation and competitive remuneration, and incentivising employers and employees to work together to contribute to a strong and sustained post COVID-19 economic recovery.

4.12 Going forward, businesses offering employee share schemes, where participants do not have to pay or borrow to participate in an employee share scheme, will not have to consider or comply with any requirements under the Act in respect of the employee share scheme.

4.13 These reforms build on the:

•

Government's previous announcement on 13 November 2018 that it would streamline the exclusions under the Act and ASIC class orders to make it easier for businesses to offer employee share schemes;

•

consultation paper released on 3 April 2019 outlining possible approaches;

•

changes announced as part of the 2021-22 Budget; and

•

changes announced as part of the 2022-23 Budget.

Summary of new law

4.14 If an employee share scheme receives relief under Schedule 4 to the main Bill, the standard regulatory requirements for businesses offering shares and financial products to retail clients under the Act will not apply. This will mean:

•

a scheme can be operated without an Australian financial services licence;

•

general financial advice can be provided in relation to the scheme without an Australian financial services licence;

•

the restrictions on advertising and hawking securities and financial products in the Act do not apply to the scheme; and

•

the existing disclosure requirements under the Act do not apply to offers under the scheme.

4.15 In simple terms, an employee share scheme can receive relief under Schedule 4 to the main Bill if:

•

the interests issued, sold or transferred to participants under the scheme fall within certain eligible categories of interests (for example - shares or options);

•

the participants in the scheme are directors, employees, or service providers; or

•

if the scheme requires payment to participate:

-

certain disclosure documents are provided with the offer;

-

if the scheme has an associated contribution plan, loan or trust, the contribution plan, loan or trust meet certain requirements;

-

the total numbers of products issued under the scheme over the previous three years does not exceed the specified percentage of the body's issued capital (5 per cent for listed bodies or 20 per cent for unlisted body corporates, unless otherwise specified by regulations or the body corporate's constitution); and

-

for an unlisted body corporate, all participants are generally limited to outlay a monetary cap of $30,000 per year (which can be accrued for unexercised options over a 5-year period, up to a maximum of $150,000), plus 70 per cent of dividends and 70 per cent of cash bonuses.

4.16 Generally, for an employee share scheme to receive relief under Schedule 4 to the main Bill the interests offered, issued, sold or transferred under the scheme to participants must be:

•

for listed body corporates, the interest must be able to be traded on a financial market, and be one of the below types of interests;

-

a fully paid share;

-

a beneficial interest in a fully paid share;

-

a stapled security; or

-

a unit in, an incentive right in relation to, or an option to acquire one of the above interests;

•

for unlisted bodies corporate:

-

a fully paid share; or

-

a unit in, an incentive right in relation to, or an option to acquire a fully paid share;

•

for registered schemes:

-

an interest in the registered scheme that is tradable on a financial market; or

-

a unit in, an incentive right in relation to, or an option to acquire an interest in, the registered scheme that is tradable on a financial market.

4.17 Employee share schemes which require participants to pay for an interest to participate will need to provide disclosure in relation to offers under the scheme. The disclosure requirements are streamlined versions of the general requirements under the Act.

4.18 The disclosure documents required to be provided are:

•

for a listed body corporate or registered scheme - certain warnings;

•

for an unlisted body corporate:

-

certain warnings;

-

certain financial information about the body corporate;

-

a valuation of the interests; and

-

a statement that the company is solvent.

Detailed explanation of new law

Regulatory relief for employee share schemes

4.19 If an employee share scheme does not require payment to participate:

•

the scheme can be operated without an Australian financial services licence;

•

general financial advice can be provided in relation to the scheme without an Australian financial services licence;

•

the restrictions on advertising and hawking securities and financial products in the Act do not apply to the scheme;

•

the design and distribution obligations do not apply to the issue, sale or transfer of interests under the scheme; and

•

no disclosure requirements apply to offers under the scheme.

[Schedule 4, item 33, sections 1100N, 1100P and 1100ZC of the Act]

4.20 If an employee share scheme requires payment to participate and the scheme meets the requirements in Schedule 4 to the main Bill:

•

the scheme can be operated without an Australian financial services licence;

•

general financial advice can be provided in relation to the scheme without an Australian financial services licence;

•

the restrictions on advertising and hawking securities and financial products in the Act do not apply to the scheme;

•

the design and distribution obligations do not apply to the issue, sale or transfer of interests under the scheme; and

•

a streamlined set of disclosure requirements apply to the scheme.

[Schedule 4, item 33, sections 1100N, 1100Q, and 1100ZC of the Act]

4.21 This relief also applies in relation to any contribution plan or loan which is related to the employee share scheme. [Schedule 4, items 9 and 33, section 9 definition of 'managed investment scheme' and section 1100Y of the Act]

4.22 The relief applies to any person associated with the employee share scheme such as:

•

the body which issues, sells or transfers the interests under the scheme;

•

an associated body corporate;

•

a trustee which is engaged to manage the employee share scheme; or

•

a third-party custodian who holds the interests.

[Schedule 4, item 33, section 1100ZC of the Act]

4.23 Various elements of the regulatory regime can be modified by regulations (see the section of this Chapter on modification by regulations).

4.24 This will allow businesses to run their own employee share schemes, without having the same regulatory obligations as financial services providers. This is appropriate because these regulatory obligations are designed for arm's length transactions to consumers, unlike an employee share scheme, where there is a pre-existing employment relationship between the business and participant.

4.25 An employer that is a national system employer is still required to comply with the requirements of the Fair Work Act 2009 in relation to their employees. This includes paying wages in line with any applicable modern award or enterprise agreement, or the National Minimum Wage Order for award and agreement free employees. Any employee share scheme offer must be in addition to these wages, which must be paid in full and in money.

Requirements for an employee share scheme

4.26 An offer under an employee share scheme which does not require payment to participate will be entitled to relief if:

•

the interests offered, issued, sold or transferred to participants under the scheme fall within certain categories of eligible interests (generally shares and interests in shares);

•

the participants are directors, employees, or service providers;

•

any trustee used to manage the scheme meets certain requirements; and

•

the offer is expressed to be made under Division 1A of Part 7.12 of the Act.

[Schedule 4, item 33, sections 1100N, 1100P and 1100ZC of the Act]

4.27 An offer under an employee share scheme which requires payment to participate will be entitled to relief if:

•

the interests offered, issued, sold or transferred to participants under the scheme fall within certain categories of eligible interests (generally shares and interests in shares);

•

the participants are directors, employees, or service providers;

•

any trustee used to manage the scheme meets certain requirements;

•

the offer is expressed to be made under Part 7.12 Division 1A of the Act;

•

if the scheme has an associated contribution plan or loan, the contribution plan or loan meets certain requirements;

•

the offer requires certain disclosure documents be provided;

•

the total numbers of products issued under the scheme over the previous three years does not exceed the specified percentage of the body's issued capital (5 per cent for a listed body or 20 per cent for an unlisted body corporate, unless otherwise specified by regulations or the body's constitution); and

•

for an unlisted body corporate no participant outlays more than $30,000 worth of interest under the scheme in a 12-month period, and in the case of options, cumulative over 5 years to a maximum total of $150,000.

[Schedule 4, item 33, sections 1100N, 1100Q and 1100ZC of the Act]

Diagram 4.1 Requirements for an offer under an employee share scheme

The below diagram sets out the requirements in order to qualify for regulatory relief for employee share scheme offers that do and do not require payment to participate.

4.28 An offer under an employee share scheme, which would not require disclosure under the Act due to pre-existing exemptions from the disclosure rules (such as offers to sophisticated investors or small-scale offerings) will receive relief if:

•

the interests offered, issued, sold or transferred to participants under the scheme fall within certain categories of eligible interests (generally shares and interests in shares);

•

if the scheme is utilising the small-scale offering exemption - the scheme complies with the employee share scheme rules concerning loans, trusts or contribution plans; and

•

the participants in the scheme are directors, employees or service providers.

[Schedule 4, item 33, section 1100R of the Act]

Participants in an employee share scheme

4.29 For an individual to participate in an employee share scheme they must be a director, employee or service provider of the body corporate or an associated body corporate that is issuing interests in an employee share scheme. These people are referred to in Schedule 4 to the main Bill as ESS participants. [Schedule 4, item 8, item 33, section 9, the definition of 'ESS participant' and section 1100L of the Act]

4.30 A primary participant is an employee, director, or person who provides services to:

•

the body corporate issuing the interests under the employee share scheme or an associated body corporate; or

•

in the case of an employee share scheme by a listed registered scheme - the responsible entity of the listed registered scheme or an associated body corporate.

[Schedule 4, item 8, item 33, section 9, the definition of 'ESS participant' and paragraph 1100M(1)(a) of the Act]

4.31 An employee includes a casual, part-time or full-time employee. Directors include executive and non-executive directors as well as salaried and non-salaried directors.

4.32 A person can also participate in the employee share scheme if they are about to become one of the above eligible categories (for example, a person who has received an offer to become an employee of the body issuing interests under the employee share scheme). [Schedule 4, item 33, subparagraph 1100L(1)(a)(iii) of the Act]

4.33 Certain people who are related to the primary participant can also participate in an employee share scheme. These are referred to in Schedule 4 to the main Bill as related persons. They are:

•

a spouse, parent, child or sibling of the primary participant;

•

a body corporate which is controlled by the primary participant or their spouse, parent, child or sibling; or

•

a body corporate that is the trustee of the primary participant's self-managed superannuation fund.

[Schedule 4, item 33, paragraph 1100L(1)(b) of the Act]

Diagram 4.2 Primary participants and related participants

The below diagram represents the two kinds of participants in an employee share scheme - primary participants and related participants. Primary participants are an employee, director, or other service provider to a business. Related participants are certain family members of the primary participant and bodies corporate controlled by certain family members of a primary participant. Related participants can also participate in an employee share scheme through their relationship with the primary participant.

Interests in an employee share scheme

4.34 For an employee share scheme to receive relief under Schedule 4 to the main Bill, the interests offered to participants must fall within certain eligible categories of interests, referred to in Schedule 4 to the main Bill as ESS interests.

4.35 The ESS interests for a listed body corporate are:

•

a fully paid share which is tradable on an eligible financial market;

•

a beneficial interest in a fully paid share where the interest is in a class of interests which is tradable on an eligible financial market;

•

a fully paid share which can be converted into a beneficial interest (or vice versa) without charge or for a nominal fee, where either the beneficial interest or share is tradable on an eligible financial market;

•

a unit in, an incentive right, or an option to acquire, any of the above interests; or

•

a fully paid stapled security which is tradable on an eligible financial market consisting of any of the above interests, or an interest in a listed registered scheme.

[Schedule 4, item 33, subsection 1100M(1) of the Act]

4.36 The ESS interests for an unlisted body corporate are:

•

a fully paid share; or

•

a unit in, an incentive right, or an option to acquire, a fully paid share.

[Schedule 4, item 33, subsection 1100M(2) of the Act]

4.37 The ESS interests for a listed registered scheme are:

•

an interest in a listed registered scheme which is tradable on an eligible financial market; or

•

a unit in, an incentive right, or an option to acquire, an interest in a listed registered scheme.

[Schedule 4, item 33, subsection 1100M(3) of the Act]

4.38 An incentive right is a conditional right to be issued a security or financial product or a right to be paid a cash amount where the right is contingent on:

•

the price or value of the security or financial product;

•

the change in the price or value of the security or financial product;

•

the amount of dividends or distributions paid in respect of the security or financial product; or

•

the change in the amount of dividends or distributions paid in respect of the security or financial product.

[Schedule 4, item 33, subsection 1100M(4) of the Act]

4.39 A body corporate or registered scheme is a listed body corporate or registered scheme if it is listed on a financial market operated by an Australian market licensee or a foreign financial market determined by ASIC by legislative instrument. [Schedule 4, item 33, section 1100K of the Act]

Trustees managing an employee share scheme

4.40 A business can engage a trustee to manage the interests issued under an employee share scheme on their behalf, and still obtain relief under Schedule 4 to the main Bill, if the trust deed meets certain requirements.

4.41 An employee share scheme with a trustee is only able to receive an interest in an employee share scheme if the trust deed states:

•

the activities of the trustee are limited to managing only the employee share schemes of the body corporate - by either transferring interests under the schemes to participants or issuing units in the interests to participants;

•

the trustee keeps written records on the administration of the trust;

•

the trustee does not take any administration fees out of trust funds, other than reasonable disbursements;

•

the trustee only charges fees or amounts to the body corporate or entity responsible for the employee share scheme (i.e. not the participants); and

•

if the trustee is an associated body corporate of the body corporate issuing the interests or the responsible entity of the listed registered scheme - that the trustee only exercise voting rights in accordance with the instructions of the participants or consistently with their fiduciary duties.

[Schedule 4, item 33, section 1100S of the Act]

4.42 The requirements are generally designed to minimise financial risk for participants in the employee share scheme by ensuring the trustee acts in the best interests of the participants and to minimise the possibility of conflicts of interest.

4.43 If an offer that is made by a trustee who manages an employee share scheme requires a participant to make a payment to participate, the offer document must include:

•

the trust deed; or

•

a summary of the trust deed and a statement that the full deed will be made available upon the participant's request.

[Schedule 4, item 33, paragraph 1100W(2)(h) of the Act]

4.44 If a participant has only been provided a summary of the terms of the trust deed for an offer under an employee share scheme and the participant then requests the full terms, those full terms must be provided within 10 days. [Schedule 4, item 33, paragraph 1100Y(1)(d) of the Act]

4.45 Offers of eligible interests to participants under an employee share scheme which would not ordinarily require disclosure, such as offers to senior managers, are not required to comply with the trust requirements. However, offers utilising the small-scale offering exemption must comply with the trust requirements. [Schedule 4, item 33, section 1100R of the Act]

4.46 This requirement applies regardless of whether the offer is made by a listed body corporate, listed registered scheme or unlisted body corporate.

4.47 For an offer by an employee share scheme trustee to be eligible for relief, the offer must include a term that requires the trustee comply with the trust deed. [Schedule 4, item 33, paragraph 1100Y(1)(e) of the Act]

4.48 An employee share scheme which accepts payment and does not comply with its trust deed will have its regulatory relief revoked. [Schedule 4, item 33, section 1100ZG of the Act]

Diagram 4.3 Trustees under employee share schemes

The below diagram demonstrates the relationship between the body corporate issuing interests under the employee share scheme, a trustee holding those interests and the participants in the scheme. A body corporate generally issues interests in an employee share scheme directly to a trustee, who holds the interests on behalf of participants. The trustee can subsequently issue the interests to the participants, as new participants join the businesses. The trustee can also issue units over interests it holds to participants, and still hold legal title to the interests in the scheme.

Employee share scheme contribution plans

4.49 Employee share schemes can have contribution plans associated with the scheme to allow participants to purchase the interests and still receive regulatory relief under Schedule 4 to the main Bill.

4.50 An employee share scheme contribution plan enables employees to pay for an interest over time. The employee only receives the interest after fully paying off the interest under the plan. A contribution plan contrasts with a loan arrangement, where the employee receives full ownership of the interest upfront and repays the loan over time.

4.51 Contribution plans generally require the participants to make repayments or allow for deductions to be made from their salary or wages.

4.52 An employee share scheme can be eligible for relief under Schedule 4 to the main Bill even if it has an associated contribution plan. However, the contribution plan must meet certain requirements (referred to in Schedule 4 to the main Bill as an ESS contribution plan).

4.53 For an employee share scheme with an associated contribution plan to be eligible for relief, the contribution plan must:

•

have contributions held on trust in an account with an Australian authorised deposit-taking institution which is solely kept for that purpose;

•

allow the participant to discontinue from the deductions or payments at any time;

•

if the participant decides to discontinue - within 45 days any deductions from salary or wages must cease and all deductions or payments, not yet exchanged for interests, must be repaid to the participant; and

•

before participating in the plan, the participant must agree in writing to the terms of the plan.

[Schedule 4, items 8 and 33, section 9 definition of 'ESS contribution plan' and section 1100T of the Act]

4.54 If an offer is made with a related ESS contribution plan, each participant receiving the offer must be provided with:

•

the terms of the contribution plan; or

•

a summary of the terms and a statement that the full terms will be made available upon the participant's request.

[Schedule 4, item 33, paragraph 1100W(2)(g) of the Act]

4.55 If a participant has only been provided a summary of the terms of the contribution plan for an offer under an employee share scheme and the participant then requests the full terms, those full terms must be provided within 10 days. [Schedule 4, item 33, paragraph 1100Y(1)(c) of the Act]

4.56 The obligation for payment for a contribution plan provided in association with an employee share scheme must fall on the individual who receives the interests under the scheme, whether they be the primary participant or a related participant. [Schedule 4, item 33, section 1100T of the Act]

4.57 Offers of eligible interests to participants under an employee share scheme which would not ordinarily require disclosure, such as offers to senior managers, are not required to comply with the contribution plan requirements. However, offers utilising the small-scale offering exemption must comply with the contribution plan requirements. [Schedule 4, item 33, section 1100R of the Act]

4.58 This requirement applies regardless of whether the offer is made by a listed body corporate, listed registered scheme or unlisted body corporate.

4.59 The existence of a settlement period between paying for an interest and receiving that interest does not automatically create a contribution plan and trigger the additional regulatory obligations associated with contribution plans.

4.60 An employee share scheme which ceases to comply with the requirements for contribution plans and has accepted payment will have its regulatory relief under Schedule 4 to the main Bill revoked. [Schedule 4, item 33, section 1100ZG of the Act]

Employee share scheme loans

4.61 An employee share scheme with an associated loan can be eligible for relief if the loan meets certain requirements.

4.62 A loan in relation to an employee share scheme allows the participant to take full ownership of their interest immediately, as opposed to a contribution plan, where a participant acquires their interests over time. The participant can then pay for their interests over time, while receiving full ownership of their ESS interest upfront along with any of the rights associated with that interest (for instance, voting rights attached to shares).

4.63 For an employee share scheme with an associated loan to be eligible for relief:

•

the loan must have no interest or fees payable;

•

in the event of non-payment of the loan, the rights against the participant are limited to forfeiture of the interests acquired using the loan; and

•

if the loan is by an unlisted company, the loan cannot be provided to an existing shareholder.

[Schedule 4, item 33, section 1100U of the Act]

4.64 These conditions are designed to avoid employees suffering losses due to interest payments or loss of security for the loans other than the interest itself. The requirement that a loan is not provided to an existing shareholder for unlisted companies is designed to prevent a tax liability under Division 7A of the Income Tax Assessment Act 1936.

4.65 If an offer is made with a related loan each participant receiving the offer must be provided with:

•

the terms of the loan; or

•

a summary of the terms and a statement that the full terms will be made available upon the participant's request.

[Schedule 4, item 33, paragraph 1100W(2)(g) of the Act]

4.66 If a participant has only been provided a summary of the terms of the loan for an offer under an employee share scheme and the participant then requests the full terms, those full terms must be provided within 10 days. [Schedule 4, item 33, paragraph 1100Y(1)(c) of the Act]

4.67 The obligation for repayment for a loan provided in association with an employee share scheme must fall on the individual who receives the interests under the scheme, whether they be the primary participant or a related participant. [Schedule 4, item 33, paragraph 1100U(1)(b) of the Act]

4.68 These requirements apply regardless of whether the offer is made by a listed body corporate, listed registered scheme or unlisted body corporate.

4.69 Offers of eligible interests to participants under an employee share scheme which would not ordinarily require disclosure, such as offers to senior managers, are not required to comply with the loan requirements. However, offers utilising the small-scale offering exemption must comply with the loan requirements. [Schedule 4, item 33, section 1100R of the Act]

4.70 An employee share scheme which ceases to comply with the requirements for loans and has accepted payment will have its regulatory relief revoked. [Schedule 4, item 33, section 1100ZG of the Act]

4.71 Other conditions can be included in the terms of the loan (such as requirements that dividends received by participants on account of holding interests purchased using the loan, be used to pay down the loan).

The issue cap

4.72 An offer from an employee share scheme which requires payment to participate can only be eligible for relief if it complies with the issue cap. [Schedule 4, item 33, section 1100V of the Act]

4.73 Employee share schemes are only intended to allow businesses to attract and keep employees. They are not intended to allow a body corporate to raise funds. If a body corporate wishes to raise funds it must use other means (for example, issuing shares under a prospectus).

4.74 The issue cap limits the proportion of its share capital a body corporate can issue under an employee share scheme to ensure the offer is genuinely for attracting and retaining employees.

4.75 The issue cap also limits the proportion of shares that may be subsequently issued under interests made as part of an offer under an employee share schemes (for example, an offer of options under an employee share scheme which can be exercised and result in shares being issued 12 months later).

4.76 An offer by an employee share scheme complies with the issue cap if the sum of the two below numbers do not exceed the specified percentage of interests actually issued by the body:

•

the number of interests that may be issued, directly or indirectly, as a result of the offer; and

•

the number of interests that have been issued, or could be issued as a result of previous offers, in connection with an employee share scheme made during the previous three years.

[Schedule 4, item 33, subsection 1100V(2) of the Act]

4.77 The specified percentage is, if the constitution of the body corporate or registered scheme specifies a percentage, that percentage. If not, the cap is the greater of 5 per cent for a listed body corporate or 20 per cent for an unlisted body corporate, or the percentage (if any) prescribed by regulations. [Schedule 4, item 33, subsection 1100V(2) of the Act]

4.78 The issue cap does not apply to interests issued under an employee share scheme where payment is not required to participate. [Schedule 4, item 33, sections 1100N and 1100P of the Act]

4.79 When an employee share scheme offers interests to participants which are stapled securities, the issue cap applies in relation to both of the securities which are stapled. [Schedule 4, item 33, subsection 1100V(3) of the Act]

4.80 Offers of eligible interests to participants under an employee share scheme which would not ordinarily require disclosure are not required to comply with the issue cap, such as offers to senior managers or small-scale offerings. [Schedule 4, item 33, section 1100R of the Act]

4.81 An employee share scheme which ceases to comply with the issue cap and has accepted payment will have its regulatory relief revoked. [Schedule 4, item 33, subparagraph 1100ZG(1)(c)(ii) of the Act]

The monetary cap

4.82 For offers in an unlisted company under an employee share scheme which require payment to receive relief under Schedule 4 to the main Bill, the offer must comply with the monetary cap.

4.83 Put simply, the monetary cap only allows a participant to outlay up to $30,000 on offers over a 12-month period, plus an additional 70 per cent of any dividends and 70 per cent of cash bonuses received in that year. [Schedule 4, item 33, section 1100ZA of the Act]

4.84 The first 12-month period applies from the day when the participant accepts the offer under an employee share scheme. [Schedule 4, item 33, paragraph 1100ZA(1)(a) of the Act]

4.85 An employee share scheme which ceases to comply with the monetary cap and has accepted payment will have its regulatory relief revoked. [Schedule 4, item 33, subparagraph 1100ZG(1)(c)(iii) of the Act]

Application of the cap

4.86 The monetary cap applies to the total amount of expenditure by a participant under offers from an employee share scheme. The monetary cap does not just apply to an individual offer. If multiple offers are made to a participant, which if accepted would breach the monetary cap, the terms of offers would need to be drafted so payments can only be made up to the monetary cap. [Schedule 4, item 33, subsection 1100ZA(1) of the Act]

4.87 The cap is used up as the participant expends money or takes out loans on offers. This includes current offers, for example purchasing shares upfront, as well as exercising rights to purchase shares under earlier offers of options. This includes payments made directly or payments made using a contribution plan. [Schedule 4, item 33, paragraph 1100ZA(4)(a) of the Act]

4.88 Money paid from a contribution plan only counts towards the monetary cap when exiting a contribution plan to be exchanged for the interests under the offer from the employee share scheme. Money paid into a contribution plan which has not yet been exchanged for interests does not use up the monetary cap. [Schedule 4, item 33, paragraph 1100ZA(4)(a) and subsection 1100ZB(2) of the Act]

4.89 The monetary cap is per person directly entitled. Should offers be made to a primary participant and a related participant of that primary participant, then the cap applies in relation to payments made by both the primary participant and the related participant. [Schedule 4, item 33, subsection 1100ZA(3) of the Act]

Dividends and cash bonuses

4.90 The monetary cap for each participant in each year will increase by 70 per cent of the value of any distributions that participant received from interests under the employee share scheme and 70 per cent of any cash bonuses they receive from their employment in that company in that year. [Schedule 4, item 33, paragraphs 1100ZA(5)(b) and (c) of the Act]

4.91 This will allow more senior individuals receiving more remuneration in the company from dividends or bonuses to have a higher cap for a particular year.

4.92 Cash bonuses and dividends are also additional payments. This means there is less financial risk for participants in relation to these payments, as the loss of these payments should not significantly affect an individual's take home pay.

Accrual of the cap for option plans

4.93 A participant's monetary cap can be accrued in circumstances of an option plan, in respect of unexercised options over a 5-year period. [Schedule 4, item 33, subsection 1100ZA(5) of the Act]

4.94 The amount accrued is the value of interests the participant has the right to purchase in that year under their option plan, which they have chosen to not purchase.

4.95 This will still be subject to the cap of $30,000 per year and have a maximum cap of $150,000 accrued over a 5-year period. The dividends and cash bonuses component of the cap cannot accrue.

4.96 The first 12-month period applies from the day when the participant accepts an options plan under an employee share scheme. [Schedule 4, item 33, paragraph 1100ZA(1)(a) of the Act]

4.97 After the 5-year period, any unspent amounts can continue to be accrued (or 'roll over') to increase the monetary cap, however, any unspent monies under the cap from year one would no longer contribute to the cap in the 6th year. [Schedule 4, item 33, subsection 1100ZA(5) of the Act]

Exemption from the cap - liquidity events

4.98 The monetary cap does not apply when there is a liquidity event, such as a business being purchased or listed on a financial market. [Schedule 4, item 33, section 1100ZB of the Act]

4.99 The exemption will allow participants to take part in a liquidity event through their employee share scheme by expending larger amounts of money than would generally be allowed under the monetary cap. Greater expenditure is appropriate in these circumstances because there is limited financial risk as the participant will have accurate information as to the market value of their interests (i.e. the listing price or the purchase price in a private sale) and there is a genuine opportunity to sell their interests to realise gains.

4.100 The exemption works in conjunction with the monetary cap. The monetary cap is applied up until a liquidity event occurs, which will result in the cap being lifted so that participants can purchase an unlimited amount of interests.

4.101 To take advantage of the exemption in the monetary cap, payments by participants can be made no longer than 7 days before an anticipated liquidity event. These amounts paid in anticipation of a liquidity event must be held on trust and be returned as soon as practicable if the liquidity event does not occur. [Schedule 4, item 33, subsections 1100ZB(4) to (5) of the Act]

4.102 A failure to keep the money on trust until it is returned to the participant or until the liquidity event occurs is a strict liability offence with a penalty of 60 penalty units. [Schedule 4, items 33 and 37, subsection 1100ZF(1) and Schedule 3 of the Act]

4.103 Failure to return the money as soon as practicable is a strict liability offence with a penalty of 20 penalty units. [Schedule 4, items 33 and 37, subsection 1100ZF(2) and Schedule 3 of the Act]

4.104 For the purposes of Schedule 4 to the main Bill, a liquidity event means the point at which either:

•

an unlisted company is listed on an official list of a financial market; or [Schedule 4, item 33, paragraph 1100ZB(7)(a) of the Act]

•

there is an executed sale agreement to acquire interests, covering the participant's interests or underlying shares, open to acceptance by the participant or related person. [Schedule 4, item 33, paragraph 1100ZB(7)(b) of the Act]

4.105 In summary, the monetary cap for a particular participant in a particular year will be the sum of:

•

$30,000; and

•

if there are unexercised options from previous 5 years, an amount equal to the price that would have been paid for those unexercised options; and

•

70 per cent of the dividends from interests in the businesses the participant has received in that year; and

•

70 per cent of the cash bonuses the participant has received in that year.

[Schedule 4, item 33, subsection 1100ZA(5) of the Act]

Diagram 4.4 Monetary cap

The below diagram shows how the monetary cap applies over 6 years, for both standard offers as well as options. In the case of options, it demonstrates how the cap is accrued over the 6 years.

4.106 Offers of eligible interests to participants under an employee share scheme which would not ordinarily require disclosure are not required to comply with the monetary cap, such as offers to senior managers or small-scale offerings. [Schedule 4, item 33, section 1100R of the Act]

Disclosure under an employee share scheme

4.107 To ensure participants can make an informed choice as to whether to accept an offer under an employee share scheme, Schedule 4 to the main Bill requires that employers provide participants certain information in the form of disclosure documents in relation to the interests they receive.

4.108 These disclosure documents are less onerous than the general existing disclosure requirements for shares and financial products issued to the general market (for example, prospectuses and product disclosure statements under Chapter 6D and Part 7.9 of the Act).

4.109 Disclosure can be required at two different points in time in relation to an offer:

•

upfront, before the interest is issued or sold in exchange for payment; and

•

at a later point after an interest has been sold, before an option or incentive right can be exercised.

Diagram 4.5 Disclosure timing

The below diagram shows the timing requirements of disclosure documents. Disclosure requirements are indicated by a tick (?) at the necessary points in time, either upfront when issuing the offer or at the point of exercising the offer.

4.110 Different disclosure documents are required for different types of employee share schemes, in particular for listed and unlisted schemes. Different disclosure documents are also required depending on the interest under the scheme (for example, shares as opposed to options and incentive rights).

Disclosure for offers without payment

4.111 Offers that do not require payment to participate, do not require disclosure to be eligible for regulatory relief. [Schedule 4, item 33, sections 1100N and 1100P of the Act]

4.112 This only applies to offers where there is no payment required upfront, nor at any future stage, for the issue or transfer of interests under the employee share scheme (such as under an option plan).

Disclosure for interests with payment upfront (not options)

4.113 Offers that require upfront payment must provide disclosure in accordance with Schedule 4 to the main Bill. [Schedule 4, item 33, paragraphs 1100Q(1)(f) to (g) of the Act]

4.114 For an offer that requires payment upfront, 14 days before making an offer, the participant must be provided with:

•

a set of warnings (referred to in Schedule 4 to the main Bill as an ESS offer document);

•

in addition, for an unlisted body corporate:

-

certain financial information about the body making the offer;

-

a valuation of the interests being offered;

-

a statement that the body making the offer is solvent; and

•

if the offer is made with a related loan, disclosure documents in relation to the loan;

•

if the offer is made with a related contribution plan, disclosure documents in relation to the contribution plan; and

•

if the interests are to be held by a trustee for the participants, disclosure documents in relation to the trustee.

[Schedule 4, item 33, paragraphs 1100Q(1)(f), (g) and (2)(a) and sections 1100W to 1100X of the Act]

4.115 The disclosure requirements for a listed body corporate or listed registered scheme are less onerous than those for an unlisted body corporate as the value of an ESS interest which is listed is easy to ascertain when compared to an unlisted body corporate.

4.116 A participant cannot acquire an interest until 14 days after receiving the above documents. This mandates a waiting period ensuring a participant has time to consider their decision or seek additional legal or financial advice. [Schedule 4, item 33, paragraph 1100Y(1)(a) of the Act]

4.117 The documents must be updated as soon as practicable to reflect any material or substantive changes that occur. [Schedule 4, item 33, paragraph 1100Z(1)(b) of the Act]

4.118 If the offer document included only a summary of the terms of the offer, loan, contribution plan or trust deed then the body corporate or responsible entity must provide the participant with a copy of the full version if the participant requests it, within 10 business days. [Schedule 4, item 33, paragraphs 1100Y(1)(b) to (d) of the Act]

ESS offer document

4.119 For a listed body corporate or listed registered scheme, the offer document must:

•

include the terms of the offer, and any relevant loan, contribution plan or trust deed or a summary of those terms with a statement that a copy of the full terms will be provided to the participant on request;

•

provide general information about the risks of acquiring and holding the interests being offered;

•

state that advice given in relation to the offer does not take into account the participants objectives, financial situation and needs;

•

suggest that the participant obtain personal advice in relation to the offer;

•

state the application period during which the participant may accept the offer;

•

include the acquisition price of the interest or how a participant could from time to time ascertain the market price of their interest, or if the interest is a unit, option or incentive right, the acquisition price of the underlying product in Australian dollars; and

•

draw the participant's attention to relevant disclosure documents produced in the previous 12 months.

[Schedule 4, item 33, subsection 1100W(1) of the Act]

Additional documents for an unlisted employee share scheme

4.120 For an unlisted body corporate, the ESS offer document must:

•

include the terms of the offer, and any relevant loan, contribution plan or trust deed or a summary of those terms with a statement that a copy of the full terms will be provided to the participant on request;

•

provide general information about the risks of acquiring and holding the interests being offered;

•

state that advice given in relation to the offer does not take into account the participants objectives, financial situation and needs;

•

suggest that the participant obtain personal advice in relation to the offer;

•

state the application period during which the participant may accept the offer;

•

draw the participant's attention to relevant disclosure documents produced in the previous 12 months;

•

state that the interest may not have any value and that the value of the interest will depend on future events that may not occur; and

•

if the interests being offered are non-ordinary shares - contain a statement about the rights that attach to the shares and how this differs to the rights that attach to ordinary shares.

[Schedule 4, item 33, subsections 1100W(1) to (3) of the Act]

4.121 The financial information about an unlisted body corporate, which must be provided with an ESS offer to each participant is:

•

if the body corporate must lodge a report for a financial year with ASIC under section 319 of the Act-a copy of the most recent report lodged with ASIC; or

•

if the body corporate is a registered foreign body corporate-a copy of the most recent balance sheet lodged with ASIC under section 601CK; or

•

a balance sheet and profit and loss statement prepared in compliance with the Australian or international accounting standards.

[Schedule 4, item 33, subsection 1100X(2) of the Act]

The financial information must be accompanied by a statement as to whether the financial information has been audited. [Schedule 4, item 33, subparagraph 1100Y(4)(a)(i) of the Act]

4.122 A valuation can include:

•

a valuation that has been prepared consistently with an applicable method approved by the Commissioner of Taxation under section 960 412 of the ITAA 1997; [Schedule 4, item 33, paragraph 1100X(3)(a) of the Act]

•

a disclosure document for any other securities in the same class as the interest that are on offer at the same time and that have been lodged with ASIC; [Schedule 4, item 33, paragraph 1100X(3)(b) of the Act]

•

a disclosure document for any financial products in the same class as the interest that are on offer at the same time; or [Schedule 4, item 33, paragraph 1100X(3)(c) of the Act]

•

a copy of an executed or draft agreement for acquiring an ESS interest in that class on arms lengths terms by a third party; or [Schedule 4, item 33, paragraphs 1100X(3)(d) to (e) of the Act]

•

another document prescribed in the regulations. [Schedule 4, item 33, paragraph 1100X(3)(f) of the Act]

4.123 A draft sale agreement can only be used if a sale agreement that is not materially different from the draft sale agreement is subsequently executed, otherwise the relief under Schedule 4 to the main Bill will be revoked if the employee share scheme has also accepted payment under the Act. [Schedule 4, item 33, subsection 1100Y(3), paragraph 1100Y(4)(c) and subparagraph 1100ZG(1)(c)(vi) of the Act]

4.124 The policy intent is for a body corporate, where possible, to be able to use the same valuations that they make, to assist participants with determining their income tax liabilities, to conduct the valuation.

Disclosure for option plans and incentive rights

4.125 Option plans and incentive rights in a body corporate that is not included on an official list of a financial market require two points of disclosure in order to receive relief under Schedule 4 to the main Bill. [Schedule 4, item 33, section 1100W and subsection 1100Y(4) of the Act]

4.126 Option plans and incentive rights require disclosure upfront, regardless of whether acceptance of the offer requires payment or not. However, where there is no payment, the offer document is the only form of disclosure required at the point of offer. Options with both an upfront price and exercise price will require streamlined disclosure at both points. [Schedule 4, item 33, paragraphs 1100Q(1)(f), 1100Q(2)(a) and 1100Y(4)(a) of the Act]

4.127 Additionally, before each exercise period during which an option or incentive right can be exercised or an amount can be paid allowing the incentive right to vest, a valuation, financial statements and solvency statements must be provided at least 14 days prior. [Schedule 4, item 33, paragraph 1100Y(4)(b) of the Act]

4.128 A draft sale agreement can only be used if a sale agreement that is not materially different from the draft sale agreement is subsequently executed, otherwise the relief under Schedule 4 to the main Bill will be revoked if the employee share scheme has also accepted payment under the Act. [Schedule 4, item 33, subsection 1100Y(3), paragraph 1100Y(4)(c) and subparagraph 1100ZG(1)(c)(vi) of the Act]

Penalties for breaching the regime

4.129 There are three possible types of penalties for breaching the rules in relation to employee share schemes in Schedule 4 to the main Bill:

•

breaching of a contractual term;

•

revocation of regulatory relief; and

•

criminal offences.

4.130 To obtain regulatory relief, an offer by an employee share scheme must contain certain mandatory contractual terms which require the offeror to comply with the regime. If the offeror then breaches these terms, they will have breached their contract and the participant can seek a variety of contractual remedies, including damages. [Schedule 4, item 33, paragraphs 1100P(c) and 1100Q(1)(g) and sections 1100Y and 1100Z of the Act]

4.131 To obtain regulatory relief, an offer by an employee share scheme must also be on terms that comply with the monetary cap and any applicable, loan, trust and contribution plan requirements. If the offeror breaches these terms, they will have breached their contract and the participant seek a variety of contractual remedies, including damages. [Schedule 4, item 33, sections 1100P, 1100Q, 1100S, 1100T, 1100U and 1100ZA of the Act]

4.132 If an employee share scheme breaches certain key obligations of the regulatory regime, such as the issue cap or obligations around trusts, loans and contribution plans and has accepted payment, the employee share scheme may have its regulatory relief revoked (see below). [Schedule 4, item 33, section 1100ZG of the Act]

4.133 If a disclosure document contains misleading and deceptive statements or omissions, or is out of date, relief is not revoked but the offeror may commit an offence (see below). [Schedule 4, item 33, sections 1100ZH and 1100ZI of the Act]

4.134 It is also an offence to deal with participants' money inappropriately in certain circumstances, and for particular people to fail to notify the business of misleading or deceptive statements or omissions in disclosure documents. [Schedule 4, item 33, sections 1100ZE, 1100ZF and 1100ZJ of the Act]

Breaching of contractual terms

4.135 For an offer of interests under an employee share scheme to receive relief under Schedule 4 to the main Bill, the compliance with certain regulatory requirements must be included as contractual terms in the offer.

4.136 These requirements that must be included in the terms of offer are:

•

compliance with the monetary cap; and [Schedule 4, item 33, section 1100ZA of the Act]

•

compliance with the various disclosure obligations. [Schedule 4, item 33, paragraph 1100Q(1)(g) and sections 1100Y and 1100Z of the Act]

4.137 Additionally, if the scheme involves a trust, loan or contribution plan, certain requirements must be met by the terms of the loan, trust or contribution plan. [Schedule 4, item 33, sections 1100S, 1100T and 1100V of the Act]

4.138 If these terms are not included, the scheme will not receive regulatory relief under Schedule 4 to the main Bill. This means the scheme will be in breach of various prohibitions in the Act such as selling securities or financial products without disclosure (see sections 707 and 1012B). [Schedule 4, item 33, sections 1100P and 1100Q of the Act]

4.139 If these terms are included, but the offeror subsequently breaches the terms, the offeror will have breached their contract and the participant can recover a variety of contractual remedies, including damages. [Schedule 4, item 33, section 1100Y of the Act]

Contractual terms relating to disclosure

4.140 For an offer by an employee share scheme to receive regulatory relief, terms must be included which require:

•

the offer document and any supporting documents to not include any misleading or deceptive statements or omissions; and [Schedule 4, item 33, paragraph 1100Z(1)(a) of the Act]

•

certain people listed in the legislation (directors of the body, people named in the offer etc) to inform the employee share scheme, if they become aware of any misleading, deceptive, out of date, omitted or otherwise materially incorrect elements in the offer document or supporting documents. [Schedule 4, item 33, paragraph 1100Z(1)(b) of the Act]

4.141 The contractual terms must allow a participant who suffers loss or damage from an out of date or deceptive or misleading statement or omissions, or a failure to provide required supporting documents, to recover damages from:

•

the body corporate or responsible entity making the offer;

•

each director of the body corporate or responsible entity making the offer;

•

a person named in any disclosure document with their consent as a proposed director of the body corporate or responsible entity of a listed registered scheme;

•

in the case of misleading or deceptive statements or omissions, a person named in the disclosure documents with their consent who made the misleading or deceptive statement or omission or statement on which the misleading or deceptive statement or omission is based; and

•

in the case of a failure to notify, the persons mentioned in the above three dot points who fail to notify the body corporate or responsible entity.

[Schedule 4, item 33, subsection 1100Z(2) of the Act]

4.142 The contractual term can be limited so that the above individuals are not liable for a participant's loss or damage where:

•

the persons made all necessary enquiries that were reasonable in the circumstances and after doing so, believed on reasonable grounds that the statements were not misleading or deceptive; or

•

the person did not know that the statement was misleading or deceptive; or

•

the person was unaware of a new circumstance that has arisen during the application period; or

•

if the person is a person named in a disclosure document - the person publicly withdraws their consent to be named in the disclosure document; or

•

if the person is a body corporate or a responsible entity of a listed registered scheme - the person relied on information from someone other than a director, employee or agent; or

•

if the person is an individual - the person relied on information from someone other than an employee or agent of the individual.

[Schedule 4, item 33, subsection 1100Z(3) of the Act]

Revoking of regulatory relief

4.143 For an offer of interests under an employee share scheme to receive relief under Schedule 4 to the main Bill, compliance with certain regulatory requirements must be included as essential terms in the offer. If the scheme involves a trust, loan or contribution plan, these must also have terms which meet particular requirements.

4.144 If these terms are not included, the scheme will not receive regulatory relief under Schedule 4 to the main Bill and will be in breach of various prohibitions in the Act such as selling securities or financial products without disclosure (see above). [Schedule 4, item 33, sections 1100P and 1100Q of the Act]

4.145 If an offeror breaches certain key regulatory terms of the regime, and accepts payment under the employee share scheme, the schemes regulatory relief will be revoked and taken to never have applied. This will mean the scheme will have breached various prohibitions in the Act such as selling securities or financial products without disclosure (see above). [Schedule 4, item 33, sections 1100P and 1100Q of the Act]

4.146 The requirements that result in revoking regulatory relief if breached are after an employee share scheme accepts payment are:

•

the requirements for loans, trusts and contribution plans;

•

compliance with the monetary cap;

•

compliance with the issue cap; and

•

providing disclosure documents at the required time.

[Schedule 4, item 33, section 1100ZG of the Act]

4.147 The limitation period for civil suits and ASIC taking enforcement action begins when the regulatory relief is revoked, as opposed to when the interests are originally issued. [Schedule 4, item 33, subsections 1100ZG(4) to (5) of the Act]

Criminal offences

Misleading and deceptive statements offences

4.148 A person must not offer interests under an employee share scheme if the offer document or supporting information:

•

contains a misleading or deceptive statement;

•

omits information in a way that causes the document to be misleading or deceptive; or

•

does not reflect a new circumstance that has arisen during the offer period. [Schedule 4, item 33, subsections 1100ZH(1) to (2) of the Act]

4.149 Likewise, a person must not provide disclosure documents to a participant during the exercise period for an option or incentive right under an employee share scheme if the document:

•

contains a misleading or deceptive statement;

•

omits information in a way that causes the document to be misleading or deceptive; or

•

does not reflect a new circumstance that has arisen during the offer period. [Schedule 4, item 33, subsections 1100ZI(1) to (2) of the Act]

4.150 A person commits an offence if the misleading or deceptive statement or omission is materially adverse from the point of view of a participant in an employee share scheme. The penalty for a person who commits the offence is a maximum penalty of 5 years imprisonment. [Schedule 4, items 33 and 37, subsections 1100ZH(4) and 1100ZI(4) and Schedule 3 of the Act]

4.151 A person also commits an offence if they fail to inform the business operating an employee share scheme if they become aware of a misleading or deceptive statement or omission in a disclosure document, if the person:

•

is a director of the relevant body corporate (or a proposed director); or

•

the person is named in the disclosure document and has provided information mentioned in the disclosure document. [Schedule 4, item 33, subsection 1100ZJ(2) and Schedule 3 of the Act]

4.152 Failure to do so is an offence of strict liability. The penalty for this offence is a maximum penalty of 50 penalty units. [Schedule 4, items 33 and 37, section 1100ZJ and Schedule 3 of the Act]

4.153 A statement about a future matter will be considered misleading where the person making the statement does not have reasonable grounds to make that statement. [Schedule 4, item 33, subsections 1100ZH(3) and 1100ZI(3)]

Defences to misleading and deceptive statement offences

4.154 The below defences are available for persons who would otherwise be responsible for misleading and deceptive statements or omissions in employee share scheme disclosure documents:

•

the person made all reasonable inquiries;

•

the person did not know the statement was misleading or deceptive or did not know a new circumstance had arisen;

•

the person placed reasonable reliance on another person;

•

the person publicly withdrew their consent for their statement to be used in the disclosure document;

•

the relevant documents were updated as soon as reasonably practicable.

[Schedule 4, item 33, subsections 1100ZH(4) to (11), 1100ZI(4) to (11) and 1100ZJ(5) of the Act]

4.155 Further detail in relation to each of these defences is provided below.

4.156 For these defences the defendant bears an evidential burden to point to evidence that suggests a reasonable possibility that the matter exists or does not exist. Once the defendant discharges this evidential burden, the prosecution must disprove these matters beyond reasonable doubt.

4.157 The evidential burden on the defendant is therefore fully consistent with the principle in the Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers which establishes the general rule that a defendant should only bear an evidential burden of proof for an offence-specific defence.

4.158 A person who made all reasonable inquiries in the circumstances and believed on reasonable grounds that the statement or omission was not misleading or deceptive will not be responsible for the statement. The person bears the evidential burden of establishing that they made all reasonable inquiries and had a reasonable belief that the statement was not misleading or deceptive. This is appropriate as the person is best placed to raise evidence that they made all reasonable inquiries and had the requisite reasonable belief. [Schedule 4, item 33, subsections 1100ZH(5) and 1100ZI(5) of the Act]

4.159 A person who did not know a misleading or deceptive statement or omission was misleading or deceptive will not be responsible for the statement. Similarly, where a new matter arises which would have been required to be disclosed, or which makes a document contain a misleading or deceptive statement or omission, a person will not be responsible for the statement, omission or unmentioned new matter where the person did not know about the new circumstance. The person bears the evidential burden of establishing that they did not know that the statement or omission was misleading or deceptive or that the new circumstance had arisen. This is appropriate as the person is best placed to raise evidence of their own knowledge. [Schedule 4, item 33, subsections 1100ZH(6) to (8) and 1100ZI(6) to (8) of the Act]

4.160 A person who placed reasonable reliance on information given by another person, other than if that information was given by an employee, agent or (in the case of a company) a director will not be responsible for a misleading or deceptive statement or omission. The evidentiary burden for this defence rests on the person making the claim as they are best placed to demonstrate that they did in fact place reasonable reliance on information from an independent person. [Schedule 4, item 33, subsections 1100ZH(9) to (10) and 1100ZI(9) to (10) of the Act]

4.161 A person will not be liable for a misleading or deceptive statement or omission which arises due to a new circumstance, or an undisclosed new matter, where they prove that the relevant document was updated as soon as reasonably practicable after the new circumstance arose and the updated information was provided to the participants. The evidentiary burden for this defence rests on the person making the claim as they are best placed to demonstrate that the document was updated as soon as reasonably practicable. [Schedule 4, item 33, subsections 1100ZH(11) and 1100ZH(11) of the Act]

4.162 A person named in a disclosure document as a director or as providing information for the disclosure document will not be responsible for failing to inform the employee share scheme of the misleading statement if they publicly withdrew their consent to being named in the document. A person making use of this defence has the evidentiary burden of demonstrating that they did in fact withdraw their consent publicly as they would be best placed to be able to raise the relevant evidence of their public withdrawal. [Schedule 4, item 33, subsection 1100ZJ(5) of the Act]

Offences for holding participants' money

Offence for holding participants' money before interests are transferred

4.163 A person who offers interests under an employee share scheme to participants in the scheme must:

•

hold all application money on trust for the participants until the interests are issued or the money is returned to the participants; and

•

if the money is required to be returned to the participants, return the money as soon as possible.

[Schedule 4, item 33, section 1100ZE of the Act]

4.164 Failure to keep the money on trust is a strict liability offence with a penalty of 60 penalty units. [Schedule 4, items 33 and 37, subsection 1100ZE(1) and Schedule 3 of the Act]

4.165 Failure to return the money as soon as possible is a strict liability offence with a penalty of 20 penalty units. [Schedule 4, items 33 and 37, subsection 1100ZE(2) and Schedule 3 of the Act]

Offence for holding participants' money in advance of a liquidity event

4.166 An employee share scheme must hold any amounts paid in anticipation of a liquidity event on trust and be returned as soon as practicable if the liquidity event does not occur. [Schedule 4, item 33, subsections 1100ZB(5) and (6) of the Act]

4.167 A failure to keep the money on trust until it is returned to the participant or until the liquidity event occurs is a strict liability offence with a penalty of 60 penalty units. [Schedule 4, items 33 and 37, subsection 1100ZF(1) and Schedule 3 of the Act]

4.168 Failure to return the money as soon as possible is a strict liability offence with a penalty of 20 penalty units. [Schedule 4, items 33 and 37, subsection 1100ZF(2) and Schedule 3 of the Act]

Offers with pre-existing disclosure exemptions

4.169 The Act contains pre-existing disclosure exemptions for certain types of offers (see sections 708 and 1012D). These exemptions generally relate to offers of interests to sophisticated individuals who are able to make informed decisions about the offers (for example the sophisticated investors exemption in subsection 708(8) of the Act).

4.170 An offer made by an employee share scheme can take advantage of these pre-existing exemptions in the Act. This will mean where an offer made by an employee share scheme would normally be required to comply with the streamlined disclosure requirements outlined above, an offer by an employee share scheme taking advantage of these pre-existing disclosure exemptions under Schedule 4 to the main Bill would be able to be made without any disclosure and still receive regulatory relief.

4.171 An offer under an employee share scheme, which would not require disclosure under the Act due to pre-existing exemptions will receive relief under Schedule 4 to the main Bill if:

•

the interests under the scheme are ESS interests;

•

the participants in the scheme are directors, employees or service providers; and

•

if the scheme is utilising the small-scale offering exemption and involves a loan, trust or contribution plan - the scheme complies with the rules concerning loans, trusts or contribution plans.

[Schedule 4, item 33, section 1100R of the Act]

4.172 Offers by employee share schemes using the pre-existing disclosure exemptions are not required to comply with the trust, loan and contribution requirements (except for small scale offers under subsection 708(1) of the Act). This is because such offers generally go to sophisticated individuals who are able to make informed decisions about the offers and who would already be able to receive interests without disclosure in a non-employee share scheme context. [Schedule 4, item 33, subsection 1100R(1) of the Act]

4.173 Offers made under subsection 708(1), the small-scale offering exemption, will be required to comply with the trust, loan and contribution plan requirements. This is because such offers can be provided to any individual, regardless of their level of financial literacy. [Schedule 4, item 33, subsection 1100R(2) of the Act]

4.174 Schedule 4 also puts beyond doubt that offers by employee share schemes cannot take advantage of the no-consideration exemption in 708(15) of the Act, as offers under employee share schemes are provided by businesses in exchange for consideration, namely the labour of the employees. [Schedule 4, item 33, paragraph 1100R(1)(a) and the note under paragraph 1100R(1)(b) of the Act]

ASIC Powers

ASIC exemption and modification powers

4.175 Schedule 4 to the main Bill gives ASIC a variety of regulatory tools to monitor, enforce and modify the requirements for employee share schemes.

4.176 Schedule 4 to the main Bill allows ASIC to exempt or modify Chapters 2L, 5, 5C, 6D and 7 of the Act with regard to employee share schemes. These chapters are the parts of the Act that are amended by Schedule 4 to the main Bill which contain the requirements for businesses which issue and sell financial products and securities. [Schedule 4, item 33, section 1100ZK of the Act]

4.177 Schedule 4 to the main Bill allows ASIC to modify the above chapters of the Act with regard to all employee share schemes, a class of employee share schemes or an individual employee share scheme. [Schedule 4, item 33, subsections 1100ZK(2) to (3) of the Act]

4.178 An exemption or modification by ASIC can be subject to conditions. An employee share scheme which is relying on an exemption, must comply with any conditions of that exemption. Only ASIC may apply to the Court to ensure an employee share scheme complies with a condition of an exemption. [Schedule 4, item 33, subsections 1100ZK(4) to (6) of the Act]

4.179 An exemption that relates to all or a specified class of employee share schemes must be made by legislative instrument. An exemption that relates to a specified employee share scheme must be made in a notifiable instrument. [Schedule 4, item 33, subsections 1100ZK(7) to (8) of the Act]

4.180 ASIC must provide a copy of an exemption that relates to a specified employee share scheme to the relevant body corporate or responsible entity as soon as is reasonably practical after the exemption or declaration is made. [Schedule 4, item 33, subsection 1100ZK(9) of the Act]

4.181 These exemption and modification powers are necessary to ensure flexibility in the regulatory regime. Employee share schemes are complex legal arrangements that are used in a wide variety of industries which interact with a similarly wide variety of regulatory frameworks including rules in relation to selling of securities and financial products, financial advice, hawking and advertising of securities and financial products and disclosure obligations as well as taxation and employment law. Industry practice is also often evolving as new interests enter the market, which require changes in the regulatory framework. Therefore, it is likely there are unforeseen circumstances and situations which would not be appropriate to address in the primary law. The exemption and modification powers provide ASIC the ability to address these situations and ensure the regime operates in line with the policy intent.

4.182 Exemptions made in legislative instruments will be subject to Parliamentary disallowance.

ASIC stop orders

4.183 ASIC may issue a stop order to prevent an offer being made under an employee share scheme.

4.184 ASIC may issue a stop order in relation to an offer under an employee share scheme if:

•

the offer is not worded and presented in a clear, concise and effective manner;

•

a disclosure document which is provided with the offer, does not contain the required material;

•

the offer does not contain the essential terms;

•

the offer contains a misleading or deceptive statement; or

•

a person has contravened, or is likely to contravene an essential term of the offer.

[Schedule 4, item 33, subsections 1100ZL(1) to (2) of the Act]

4.185 Before making the order, ASIC must hold a hearing and give a reasonable opportunity to any interested people to make oral or written submissions about whether such an order should be made. [Schedule 4, item 33, subsection 1100ZL(3) of the Act]

4.186 However, if ASIC considers that a delay in making the order caused by holding a hearing would be prejudicial to public interest, ASIC may make an interim order without holding a hearing for 21 days. [Schedule 4, item 33, subsections 1100ZL(4) to (5) of the Act]

4.187 Such an order by ASIC must be made in writing and be served to the person who is ordered not to offer or issue interests under an employee share scheme. [Schedule 4, item 33, subsection 1100ZL(6) of the Act]

ASIC power to request documents

4.188 ASIC may require a person to provide the offer document and any other documents ASIC thinks necessary in order to form an opinion about whether Schedule 4 to the main Bill has been complied with. [Schedule 4, item 33, subsection 1100ZM(1)]

4.189 The person must provide the information within such reasonable period and in the manner specified by ASIC. Failure to do so is a strict liability offence subject to 60 penalty units. [Schedule 4, items 33 and 37, subsections 1100ZM(2) to (3) and Schedule 3 of the Act]

Lodging documents with ASIC and public inspection

4.190 Schedule 4 to the main Bill does not require employee share scheme disclosure documents be lodged with ASIC. However, in certain circumstances disclosure documents under employee share schemes may be required to be lodged with ASIC under other provisions of the Act.

4.191 The current law provides that, if an employee share scheme disclosure document is lodged with ASIC, members of the public are entitled to inspect the lodged documents unless (see section 1274 of the Act):

•

the employee share scheme relates only to employees;

•

the disclosure document relates to ordinary shares;

•

the body corporate was incorporated less than 10 years ago;

•

all body corporates in the employee share scheme's corporate group are unlisted; and

•

the issuing body corporate has an aggregated turnover of less than $50 million.

4.192 This may make businesses more reluctant to offer employee share schemes as they may be required to make potentially sensitive internal financial information public.

4.193 Schedule 4 to the main Bill removes the requirements contained in the first three dot points above so that employee share scheme disclosure documents are not required to be made public if:

•

all bodies corporate in the employee share schemes corporate group are unlisted; and

•

the issuing body corporate has an aggregated turnover of less than $50 million.

[Schedule 4, items 34 and 35, section 1274 of the Act]

4.194 This will encourage businesses to offer employee share schemes as fewer employee share schemes will be required to make their internal financial information made public.

Modification by Regulations

4.195 Schedule 4 to the main Bill creates regulation-making powers which can modify the operation of the regime.

4.196 Schedule 4 to the main Bill contains regulation-making powers which can:

•

add additional kinds of ESS participants; [Schedule 4, item 33, subparagraphs 1100L(1)(a)(iv) and (1)(b)(iv) of the Act]

•

add new types of ESS interests; [Schedule 4, item 33, subparagraph 1100M(1)(i), paragraphs 1100M(2)(d) and 1100M(3)(d) of the Act]

•

add requirements for offers which do not require payment to participate to obtain the regulatory relief under Schedule 4 to the main Bill; [Schedule 4, item 33, paragraph 1100P(1)(d) of the Act]

•

add requirements for offers which require payment to participate to obtain the regulatory relief under Schedule 4 to the main Bill; [Schedule 4, item 33, paragraphs 1100Q(1)(h) and (2)(c) of the Act]

•

modify the issue cap by lifting the percentage from 5 per cent (for listed bodies corporate or schemes) or 20 per cent (for unlisted bodies corporate); [Schedule 4, item 33, subparagraph 1100V(2)(b)(iii) of the Act]

•

modify the monetary cap, by either lifting the basic cap amount from $30,000, providing alternatives to the monetary cap or adding additional types liquidity events which are exempt from the monetary cap; [Schedule 4, item 33, paragraph 1100ZA(4)(b) and subsections 1100ZA(6), 1100ZA(8) and 1100ZB(8) of the Act]

•

modify the disclosure requirements, including exempting certain types of offer from requiring disclosure; and [Schedule 4, item 33, subsections 1100W(4) and 1100Y(5), paragraphs 1100T(f) and 1100W(2)(j) and subparagraph 1100Y(4)(a)(iv) of the Act]

•

add requirements for trust, contribution plans and loans for employee share schemes. [Schedule 4, item 33, paragraphs 1100S(3)(e), 1100T(f) and 1100U(1)(c) of the Act]

4.197 These regulation-making powers are necessary to ensure flexibility in the regulatory regime.

4.198 Employee share schemes are complex legal arrangements that are used in a wide variety of industries which interact with a similarly wide variety of regulatory frameworks including rules in relation to selling of securities and financial products, financial advice, hawking and advertising of securities and financial products and disclosure obligations as well as taxation and employment law. Industry practice is also often evolving as new interests enter the market, which require changes in the regulatory framework.

4.199 It is therefore likely that there are unforeseen circumstances and situations which it would not be appropriate to address in the primary law. Regulation making powers in addition to ASIC exemption and modification powers are necessary to ensure decisive action can be taken in circumstances where it would be inappropriate for ASIC to intervene, and to ensure the scheme is responsive to government policy.

4.200 Regulations made under Schedule 4 to the main Bill will be disallowable and subject to parliamentary scrutiny.

Subsequent sale provisions

4.201 Generally, disclosure is not required for private sales of interests by a person under the Act after an interest has been issued. However, in some circumstances the on-sale of interests does require disclosure under the Act (see sections 707 and 1012C of the Act).

4.202 Participants in an employee share scheme can sell interests without disclosure if the participant reasonably believes they received that interest under an employee share scheme, and they reasonably believe they are only selling their interest to another participant in the same employee share scheme. [Schedule 4, item 33, section 1100ZD of the Act]

Other amendments

4.203 The existing definitions of 'employee share scheme', 'eligible employee share scheme' and 'employee share scheme buy-back' are repealed and replaced by the new definitions inserted by Schedule 4 to the main Bill. [Schedule 4, items 2, 4, 5 and 33, section 9, definitions of an 'eligible employee share scheme', 'employee share scheme' and 'employee share scheme buy-back' and section 1100L of the Act]

4.204 Consequential amendments are made to the definition and uses of 'contribution plan' throughout the Act and a new definition of 'employee share buy-back' is added. [Schedule 4, items 1, 3, 6, 10, 11, 13 and 18, section 9, definitions of 'contribution plan', 'employee share buy-back' and 'selective buy-back' and sections 709 and 257B of the Act]

4.205 The existing definition of 'ESS Interest' is repealed and replaced by a new definition inserted by Schedule 4 to the main Bill. [Schedule 4, item 7, section 9, definition of 'ESS Interest' of the Act]

4.206 Amendments are made to section 708 to direct readers to the rules for employee share schemes. [Schedule 4, items 16 and 17, section 708 of the Act]

4.207 An ESS contribution plan is excluded from the definition of a managed investment scheme in section 9 of the Act. [Schedule 4, item 9, section 9, definition of 'managed investment scheme' of the Act]

4.208 Amendments are made to sections 703B and 725A to indicate that Part 6D.3A of the Act does not apply to employee share schemes. [Schedule 4, items 14, 15, 19 and 20, sections 703B and 725A of the Act]

4.209 The content relating to employee share schemes in section 911A of the Act is removed as it has been made redundant by Schedule 4 to the main Bill. [Schedule 4, items 21 to 23, section 911A of the Act]

4.210 The content relating to employee share schemes in relation to hawking securities and financial products, and the design and distribution obligations regime in sections 736, 992A and 994B of the Act is removed as it has been made redundant by Schedule 4 to the main Bill. [Schedule 4, items 24 to 26, sections 992A and 994B of the Act]

4.211 Amendments are made to section 1010A and 1010BA of the Act to indicate that Divisions 5A, 5B, 5C and 6 do not apply to employee share schemes, as well as amendments to 1012E to direct readers to the new regime. [Schedule 4, items 27 to 32 and sections 1010A, 1010BA and 1012E]

4.212 Schedule 4 to the main Bill contains a simplified outline of the rules for employee share schemes. [Schedule 4, item 33, section 1100E of the Act]

4.213 Schedule 4 to the main Bill covers interests that are received in this jurisdiction, regardless of where any resulting issue, sale or transfer occurs. [Schedule 4, item 33, section 1100F of the Act]

4.214 Schedule 4 to the main Bill covers offers of ESS interests, invitations for applications for the issue, sale or transfer of ESS interests and invitations to purchase ESS interests. [Schedule 4, item 33, section 1100G of the Act]

4.215 The person who offers interests under Schedule 4 to the main Bill is the person who has capacity or agrees to issue the interests if the offer is accepted. [Schedule 4, item 33, section 1100H of the Act]

4.216 Offers made under an employee share scheme under Schedule 4 to the main Bill can also simultaneously rely on other pre-existing disclosure exemptions in the Act. [Schedule 4, item 33, section 1100J of the Act]

4.217 Schedule 4 to the main Bill does not apply to unlisted registered schemes. [Schedule 4, item 33, section 1100L of the Act]

4.218 Offers made under employee share schemes are not counted for the purpose of determining if the small-scale offerings exemption for disclosure applies under subsection 708(1), unless the employee share scheme is also utilising the small-scale offering exemption. [Schedule 4, item 33, subsection 1100ZC(4) of the Act]

4.219 Any offers made in connection to an employee share scheme are subject to the pre-existing offences for misleading and deceptive conduct present in the Act. These include:

•

section 1041E False and misleading statements (strict and normal offences) in relation to disseminating information that will induce persons to apply for financial products;

•

section 1041F Inducing a person to deal in financial products; and

•

section 1041 Misleading and deceptive conduct (civil liability).

4.220 Schedule 4 to the main Bill also makes amendments to allow a proprietary company to offer options in respect of its shares to existing shareholders of the company or employees of the company or a subsidiary of the company, even where this activity would require disclosure under Chapter 6D. [Schedule 4, item 11, subsection 113(3)(a) of the Act]

Commencement, application, and transitional provisions

4.221 Schedule 4 to the main Bill will commence 6 months after Royal Assent. [Schedule 4, Commencement table]

4.222 Shares from entities listed on financial markets listed in the ASIC Corporations (Definition of Approved Foreign Market) Instrument 2017/669 will be treated as shares from entities listed in Australia for the purposes of Schedule 4 to the main Bill until ASIC issues an instrument under Schedule 4 to the main Bill prescribing a different set of foreign markets. That instrument prescribes foreign markets that are covered by the rules in CO 14/1000. [Schedule 4, item 36, section 1696 of the Act]