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Client Update: Proposed new employee incentive scheme relief

22 November 2013

In brief: In response to changing market practices and growing uncertainty, ASIC has released a consultation paper and draft regulatory guide that propose broadening the current class order relief associated with employee incentive schemes. Partner Richard Spurio (view CV) and Senior Associate Georgie Korman report.


On 14 November 2013, the Australian Securities and Investments Commission (ASIC) released Consultation Paper 218, together with draft Regulatory Guide 49, relating to employee incentive schemes.

Currently, ASIC provides relief under ASIC Class Order 03/184 from certain disclosure, licensing and hawking provisions of the Corporations Act 2001 (Cth) in relation to the operation of certain employee equity schemes. ASIC has undertaken a review of this Class Order and determined that it did not cover certain aspects of schemes that are becoming increasingly commonplace in the market. Additionally, ASIC considered that there is some confusion as to how the Class Order is to be applied.

In response, ASIC has released Consultation Paper 218, which puts forward a number of new proposals aimed at broadening the current relief. These proposals are to be introduced via a new Class Order and updates to its Regulatory Guide 49.

ASIC's review is welcome and, overall, we believe that the proposals will do much to address the growing confusion and unnecessary administrative burden in this area. In particular, companies will welcome ASIC expanding the classes of financial products that can be the subject of an offer (especially by including performance rights) and the proposed simplification of the ongoing lodgment requirements.

On the other hand, there will no doubt be some aspects that will be the subject of debate over the consultation period. For example, the new 12-month mandatory holding period for a significant portion of entitlements under an offer, the additional conditions for offers to non-executive directors, the detail required in the ASIC notification and the express requirements for the offer documentation seem likely to be the subject of submissions.

Key proposals

The key proposals ASIC suggests in the Consultation Paper include:

  • expanding who can make offers;
  • expanding the categories of participants who can receive offers;
  • expanding the classes of financial products that can be offered;
  • providing greater flexibility for the structuring of employee incentive schemes; and
  • reducing the notification requirements associated with employee incentive schemes.

Each of these proposals is discussed in further detail below.

Who can make offers?

Under ASIC Class Order 03/184, in broad terms, disclosure relief is provided to listed bodies and their associated bodies corporate for certain offers made to participants under employee equity schemes. ASIC understands that there has been some confusion as to the application of 'associated bodies corporate', particularly in relation to joint ventures. Additionally, under ASIC Class Order 03/184, unlisted bodies may only make offers to their own employees (ie the current relief does not apply to offers made by wholly owned subsidiaries of unlisted bodies).

Under the new class order, ASIC is proposing to broaden its relief by:

  • clarifying that for listed entities, relief applies to 'associated body corporates' as that term is defined in ASIC CO 03/184 (rather than the narrower definition of 'related body corporate' under the Corporations Act); and
  • expanding its relief to capture wholly owned subsidiaries of unlisted bodies.

Who can receive offers?

Currently, ASIC Class Order 03/184 provides relief for offers to 'eligible employees', being full-time or part-time employees or directors of the issuer or of an associated body corporate. ASIC is proposing to expand the persons eligible to receive offers under its relief to include:

  • contractors and casual employees who meet specified conditions; and
  • prospective employees as part of an offer of employment.

ASIC has proposed imposing certain conditions on the eligibility of contractors and casual employees. In both cases, they must have been engaged for a period of at least 12 months before the date of the offer and, for contractors, it includes a condition that the contractor has worked for the pro rata equivalent of 80 per cent or more of a full-time position and, for casual employees, it includes a condition that the casual employee has worked for the pro rata equivalent of 40 per cent or more of a full time position.

ASIC is also proposing additional conditions for offers to non-executive directors. In particular, that such offers could not be subject to a performance condition, as ASIC considers that non-executive directors, if participants in performance-based schemes, would be unable to be considered as 'independent' for the purposes of the ASX Corporate Governance Council's Corporate Principles and Recommendations. We expect some debate on whether this ASIC class order is the appropriate mechanism to address such an issue.

What financial products can listed bodies offer?

ASIC Class Order 03/184 provides relief for offers for the issue or sale of fully paid shares; fully stapled securities; and options over, or units in, fully paid shares.

Having regard to the increasingly common market practice of offering a variety of financial products under an employee incentive scheme, ASIC is proposing to expand its relief to include offers by listed bodies under an employee incentive scheme of:

  • certain specified depository interests (such as ADRs and CDIs);
  • fully paid stapled securities quoted on ASX;
  • options over, or units in, specified depository interests and stapled securities; and
  • performance rights (ie rights to receive certain securities or cash that are conditional on performance or service).

ASIC has proposed that performance rights will include a right to receive:

  • shares quoted on ASX or an approved foreign exchange;
  • certain specified depository interests;
  • stapled securities quoted on ASX;
  • cash amounts equivalent to the value of those shares, depository interests or stapled securities (or any increase in their value); and
  • cash amounts equivalent to the dividends or distributions on those shares or stapled securities,

which automatically vest in the recipient for no monetary consideration if certain conditions are met, relating to length of service of the recipient and/or performance of the recipient, the issuer or an associated body corporate of the issuer.

In ASIC's view, part of the underlying rationale for its employee incentive scheme relief is a recognition that companies do not undertake these activities for fundraising purposes, but rather to foster interdependence between employers and participants. To encourage that interdependence, ASIC is proposing a new condition that each offer of eligible products under an employee incentive scheme must not result in the participant receiving a significant portion (which ASIC is proposing to set at 25 per cent) of their entitlements under the offer as cash or shares (which are not subject to restrictions from disposal) until the expiry of a minimum 12-month period.

What structures can listed bodies use when making offers?

It is becoming increasingly common for employee incentive schemes to be facilitated by third parties providing trustee and trust administration services. Given this, ASIC is seeking to provide greater flexibility for the structuring of employee incentive schemes, but different conditions are proposed depending on whether the trust is holding eligible products on an allocated basis for participants or on an unallocated basis, or both. In all cases, to be eligible for relief, trusts must have their financial records audited annually and available for inspection, and specific requirements are imposed for the trust deed. For trusts holding unallocated products, it is proposed that the trustee must not hold more than 5 per cent of the ordinary shares in the issuer as unallocated products. Given the possibility of new conditions being imposed, it will be important for companies to monitor this issue and ensure that their trust structure meets the conditions of the new class order, so that the structure is eligible for the relief.

Other conditions of the relief

ASIC is proposing to amend a number of conditions attached to the relief. In particular, ASIC is proposing to reduce the administrative burden for bodies relying on the new class order, by simplifying the notification requirements. Rather than the issuer being required to lodge its offer document with ASIC after each offer under the employee share scheme, ASIC is proposing to simplify this requirement and, instead, require the issuer only to notify ASIC within seven days of making its first offer under an employee incentive scheme in Australia in reliance on the new class order. This notification would be undertaken using a standard ASIC form, which requires the company to provide some detail on the key elements of the scheme. Unless the terms of the employee incentive scheme are substantially amended or a new plan is offered, the issuer would not be required to make any further notifications.

ASIC is also proposing to introduce a condition that the offer document be worded and presented in a clear, concise and effective manner, with a brief summary of the key risks. Having regard to the level of disclosure already made by many listed entities, including disclosure of key risks in annual reports, consideration should be given to whether disclosure of key risks in this sort of offer document will add an unnecessary burden and unnecessary complexity to the documentation. Perhaps allowing cross-references to an annual report or website would be an appropriate middle ground.

Next steps

ASIC is seeking comment on Consultation Paper 218, with submissions closing 31 January 2014. It has stated that it hopes to have its revised guidance and new class order finalised in the first half of 2014.

For further information, please contact:

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