Employee share and option plans
What are the implications of FSR for employee share and option plans?
- Changes to disclosure regime
- No substantive change to existing ASIC class orders
- Sales within 12 months of issue
- Licensing
- Other
Last updated February 2003.
The FSR regime potentially affects all employee share and option schemes operated in Australia. Here is a brief overview of some relevant issues. In particular, you should note the impact of the new licensing regime.
Changes to disclosure regime
While options and shares are generally "financial products", offers of them are not subject to the financial product disclosure regime (ie, the issue of a product disclosure statement (PDS)) under Chapter 7 of the Corporations Act. This is because they are also "securities" and they therefore remain subject to the disclosure requirements of Chapter 6D. Note, however, that awards under "phantom" schemes probably are "financial products". ASIC's approach to relief from the PDS requirement is not yet settled.
No substantive change to existing ASIC class orders
While ASIC has reissued the suite of employee share and option plan class orders to refer to the new FSR terminology, the substantive exemptions from the need to prepare a prospectus remain unchanged.
Sales within 12 months of issue
FSR has changed the rules for secondary sales, that is where a person (in this case an employee) sells a security that was issued to them without the benefit of a prospectus. This change, under the new section 707, has been an issue for the placement market in particular. The ASIC class order to alleviate the placement problem also applies to the sale of shares issued under employee share plans without a prospectus, and to the sale of listed shares issued on exercise of options granted under employee option plans without a prospectus. However, the availability of relief under the class order depends on which grounds the issuer relied on to issue the shares or options without a prospectus. Action needs to be taken at the time an offer is made under the plan to ensure that shares can be sold within 12 months of their issue without the need to prepare a prospectus.
Licensing
This is the most complex area introduced by FSR. Essentially, any person who:
- provides advice about employee shares or options (including "phantom rights"); or
- "deals in" (ie, issues or sells or arranges either) employee shares or options (including "phantom rights"),
must hold an Australian financial services licence if that activity amounts to a business that is carried on in Australia. What amounts to a "business" is a matter of fact and degree. Issues of employee shares, options or "phantom rights" may in certain circumstances constitute a business for this purpose.
If the "business test" is satisfied, does this mean that an employer needs an Australian financial services licence for every issue of shares, options or "phantom rights" to its employees? Not necessarily. A helpful provision says that if a company is issuing its own shares or granting options over its own shares, then it is not "dealing in" those financial products. That helpful provision generally does not apply to "phantom rights". Also, where there is a trustee, this exception will typically not apply to the trustee.
If the "business test" is satisfied, a licence will be needed where advice is provided. What constitutes providing advice in this context is very broad. Providing a recommendation or opinion to an employee which the employee reasonably regards as being intended to influence him or her to make a decision about a share or option, even if made orally and general in nature, would be enough to constitute advice, the giving of which, if it amounts to a business in Australia, would require the adviser to obtain an Australian financial services licence.
Clearly, care should be taken in responding to employee queries and in the preparation of share/option plan documentation. The claims against investment banks in the US in relation to advice concerning the sale of shares by employees serves to emphasise the potential risks.
Other
Do you have a plan trustee? If so, it will need to consider, for example, whether it needs to obtain an Australian financial services licence.
Do you have a loan scheme which itself constitutes a financial product?
While FSR has not revolutionised the employee share/option scheme world, its impact does bear analysing against your specific circumstances.
