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Australia – ASIC’s Updated Guidance And Prospectus Relief For Employee Incentive Schemes, And What It Means For Listed And Unlisted Companies.

27 November, 2014



On 31 October 2014, ASIC released updated guidance and prospectus relief for employee incentive schemes in the form of:


  • a revised Regulatory Guide for employee incentive schemes (RG 49); and
  • two new Class Orders, which replace Class Order [CO 03/184].


One Class Order – [CO 14/1000] – relates to listed (i.e. publicly traded) companies, whilst the other – [CO 14/1001] – deals with unlisted companies.


This alert highlights the key changes from [CO 03/184], and summarises how the new Class Orders will affect both listed companies and unlisted companies seeking to extend their incentive plans to Australian-resident employees.


In Brief


Broadly speaking, the new Class Orders represent a welcome – and long-awaited – change.  They bring ASIC’s regulatory stance into much closer alignment with market practice, expanding the scope of relief to accommodate a broader array of financial products.  [CO 14/1000], in particular, captures the key elements of case-by-case relief which ASIC has been granting to listed issuers over the past few years, largely to accommodate the shifting trends in employee incentive scheme offerings and with which [CO 03/184] was out of touch.  That being said, there remain some significant, and in our view unwarranted, limitations, especially in relation to unlisted companies.


The Key Changes


Listed Companies


[CO 14/1000] applies to “listed bodies”, meaning any company whose shares are publicly traded on the main board of any of the “eligible financial markets” set out in the table at the end of [CO 14/1000].  As in the case of [CO 03/184], the schedule of eligible financial markets includes the New York Stock Exchange and NASDAQ, as well as other major stock exchanges in Europe and Asia.


The new relief introduces welcome flexibility and a reduction in administrative burdens for listed companies wishing to offer employee scheme incentives to Australian-based participants.  After a long waiting period, ASIC has released a carefully considered, practical relief instrument which takes into account industry feedback provided during consultation.  It is something many listed companies will find was well worth waiting for.


The two key advantages are that listed companies can now:


  •  offer a broader range of products, such as stock-settled and cash-settled restricted stock units (these will fall under the new category of “incentive rights”, described in more detail below); and
  • make offers to non-executive directors, contractors and certain casual employees.


These welcome changes are in line with the trend for listed entities to offer more innovative financial products, including ones which mimic the economic performance of issuer stock rather than granting an actual equity interest, and also with the global shift towards a more mobile and less permanent workforce.


Unlisted Companies


[CO 14/1001] applies to “unlisted bodies”, meaning any company that not a “listed body” for the purposes of [CO 14/1000].


Whilst the relief under [CO 14/1001] has been extended to enable offers of shares and incentive rights, as well as options, there are also new restrictions that we believe limit the usefulness of the relief, particularly to start-up companies. These restrictions take the form of a newly introduced cap that restricts offers to A$5,000 (US$4,300) for each participant in any 12 month period, and require a valuation by directors for this purpose. Additional documentary requirements include providing a set of financial statements to employees, and a directors’ solvency resolution.


These limitations and associated compliance costs could make it more difficult for unlisted start-up companies to take advantage of the tax concessions for employee share and option schemes, which have been recently announced and are planned to come into effect from 1 July 2015.


The New Class Orders At A Glance


Listed Companies


The key features of [CO 14/1000] for listed issuers are:


Broader Range Of Prospective Offerees – In addition to full-time and part-time employees and executive directors (which were covered by [CO 03/184]), offers by listed entities can now be made to non-executive directors, as well as to contractors (which can include corporate contractors, such as family-owned companies of the contractor) and casual employees who work a 40% or more pro-rata equivalent of a comparable full-time position. Offers can also be made to prospective employees where the offer is conditional on their acceptance of an offer of employment.

Wider Range Of Products Can Be Offered – In addition to publicly traded shares or options over publicly traded shares (covered by [CO 03/184]), offers can now be made of:
 1.   certain depository interests quoted on an eligible financial market, such as US ADRs (with a fully paid share as the underlying security);

2.   interests in managed investment schemes (i.e., collective investment schemes) that are quoted on the Australian Securities Exchange;

3.   stapled securities that are quoted on the Australian Securities Exchange (typically, a stapled security is a unit in a unit trust and a share in a company, the two being “stapled” in the sense that they cannot be traded separately from one another); and

4.   options and incentive rights over the above.


The introduction of the “incentive rights” category is a key and long awaited change in the employee incentive scheme space as it will allow issuers to offer incentives such as derivatives and other financial products, and will include cash settled awards and the payment of cash dividend equivalents.  Specifically, the new class of exempt incentive rights covers any conditional right to:


1.   acquire shares or other eligible products; or

2.   be paid a cash amount determined by reference to the value of, or the change in value of, or dividends paid on, those underlying products; or

3.   a combination of both.


In contrast to ASIC’s earlier draft proposal (advanced in its Consultation Paper 218), there is no requirement under [CO 14/1000] that incentive rights vest for “no monetary consideration”.  As a result, the issue or transfer of the underlying product may be conditional on the employee paying cash (as can be the case with the exercise of options).


[CO 14/1000] doesn’t cover other derivatives (such as variable cash awards determined by reference to some benchmark other than underlying eligible products).  However in its new regulatory guide, ASIC has made clear that in its view cash payments made in an employment context that do not relate to underlying financial products (for example, volume-based sales commissions or bonuses) are not regulated by Australian securities laws.  As a result, such payments won’t need either Class Order or specific relief.


Debt securities and partly-paid securities are still excluded from the Class Order but ASIC has indicated issuers may be able to obtain specific relief for other products where policy objectives are otherwise satisfied.


Reduced Listing Period Requirement – Offers can now be made by issuers who have been listed for 3 months or more, whereas companies previously had to wait for 12 months post-listing before being able to make offers.  The securities being offered must have been quoted for at least 3 months at the time of the offer, with suspension of no more than 5 trading days in 12 months (this is an increase from the 2 trading days’ maximum suspension which applied under [CO 03/184]).

One situation not covered by [CO 14/1000] is where a company seeks to make offers to employees immediately upon becoming listed.  In such a case, the issuer would not meet the 3-month listing condition, and so would either have to delay making offers to Australian-resident employees or seek specific relief.  Potentially, this may cause timing issues for companies that become listed as a result of a merger or spin-off, and that want to preserve continuity of awards for employees by assuming the existing awards of another entity, or by immediately rolling out their own, replacement incentive plans.  However, RG 49 states that ASIC may (as it has done it the past) relax or waive the 3-month listing condition for newly-listed entities, if doing so is consistent with ASIC’s basic policy objectives (for example, if there is adequate, alternative disclosure in relation to the issuing company).


The 5% Issue Limit Continues To Apply But With A Reduced 3 Year Look-Back Period – At the time of making an offer, listed companies must have reasonable grounds to believe that the number of underlying shares issued to Australian-resident employees under the offer, together with the number of shares underlying awards issued to such persons during the past 3 years under an employee incentive scheme, must not exceed 5% of the total number of shares in that class which are on issue. This is a reduction from the 5 year look-back period which previously applied.

Trust Structures Continue To Be Available – but with some changes to the conditions which apply, which now provide:


1.   there is no longer a separate annual audit obligation as there was with [CO 03/184];

2.   trustees can hold the underlying products on either an allocated basis (where products are allocated to each specific employee) or an unallocated basis (where all products in the trust are held in a general pool);

3.   the activities of the trust must be limited to holding underlying eligible products and not, for example, a dividend reinvestment plan;

4.   the trustee must not levy any fees for operating the trust, other than reasonable disbursements (including brokerage and taxes in connection with the trust);

5.   if the issuer or an associated body corporate is the trustee (rather than a third party trustee being used), the trustee is not allowed to have discretionary voting power; and

6.   the trustee must not hold more than 5% of the issued capital of the listed body on trust.


Contribution Plans – Contribution (i.e., share purchase) plans continue to be permitted with prior agreement from the participant.  Contributions can be made from gross (before-tax) wages or salary, net (after-tax) wages or salary and/or other monies. However, contributions cannot be used to acquire options or incentive rights.  As under [CO 03/184], after-tax contributions must be held in a dedicated trust account with an Australian bank.  However, under [CO 14/1000] that account need not be established and maintained by the issuing company itself, but can instead be in the name of an “associated body corporate” of the issuer (ie a body in which the issuer has a 20% or more voting interest, or which has a 20% or more voting interest in the issuer).  As a result, an Australian subsidiary of an overseas issuer can now maintain the account without having to enter into a formal agency agreement with its parent company.  The requirements for withdrawal from contribution plans have also been relaxed.  Whereas, under [CO 03/184], an employer had to give immediate effect to a participant’s election to withdraw from the plan, under [CO 14/1000] employers have up to 45 days to process and give effect to a participant’s withdrawal notice.


Loans And Financial Assistance – are permitted provided that the arrangements do not relate to options or incentive rights, and are either no recourse or the recourse is limited to forfeiture of the eligible products acquired under the loan arrangements.  The arrangements must also be fee-free and interest-free.


The Offer Document Requirement Remains – The offer document must now be “clear, concise and effective”, and must include general information about the risks of acquiring securities. This can, we believe, be satisfied easily with a general risk statement regarding investment in securities and we do not anticipate issuers will move to a “prospectus style” risk disclosure which covers, for example, business risks relevant to the issuer or its industry.  The offer document must be accompanied by a copy or a summary of the terms of the incentive scheme, as was the case previously.  The requirement to provide participants with the Australian dollar acquisition price, or explain how it is to be determined if subject to a formula, also remains.


Lodgment Of Documents With ASIC No Longer Required But Issuers Must Lodge Notice Of Reliance The First Time They Make An Offer – Within one month after first relying on [CO 14/1000], a listed entity must lodge an ASIC Form CF08 Notice of reliance with ASIC. The notice contains certain basic information, including the identity of the issuer, the types of eligible products being offered, the relevant market on which the underlying eligible products are quoted and whether a trust, contribution plan or loan is being used to facilitate the offer. This notice will not be publicly available on ASIC’s register.  Further notices of reliance on the class order relief are only required if the entity establishes a new employee incentive scheme in reliance on the class order.  This will save administrative time and cost for issuers, particularly foreign listed issuers.


Transitional Arrangements – Entities which have relied on, or have approved the implementation of an employee share scheme in reliance on, the former [CO 03/184] or associated relief will be ‘grandfathered’.  This means that pre-existing plans that would have been covered by [CO 03/184] can continue to rely on the old ASIC class order relief, whilst individual instruments of relief that were modeled on the old class order (such as the many instruments issued by ASIC to cover offers of restricted stock units) continue in force.


Unlisted Companies


As outlined above, [CO 14/1001], which applies to unlisted companies, will now permit offers of shares, as well as options and incentive rights over such shares.  There is no general requirement that the company’s shares be listed at the time options are exercised or incentive rights vest, although such a requirement may apply if consideration is payable upon exercise or vesting.


There is no requirement that the company have only one class of shares on issue.  However, [CO 14/1001] only covers shares that are fully-paid voting ordinary shares.


There is also some limited recognition that unlisted companies may be less capitalised than listed companies, since offers by unlisted companies are only subject to a 20% (rather than a 5%) issue limit (again based on the number of shares issued under the offer, together with shares issued over the past three years under any other employee incentive schemes).


However, there are a number of conditions which in practical terms will limit the ability of unlisted companies to take advantage of the new relief, including:


  • offers must, in aggregate, not exceed AUD 5k (USD 4,300) in value per participant per year, based on a directors’ valuation made within 12 months before the offer, with the methodology for the valuation being disclosed in the offer document. This is a low dollar limit, especially in the context of start-up companies that traditionally rely on a higher portion of remuneration being in the form of equity incentives compared with other companies. The valuation requirement will also add cost and complexity, and introduce potential liability for directors;
  • offers of shares must be for no more than nominal monetary consideration.  The exercise of options and the vesting of incentive rights can be conditional upon a more-than-nominal cash payment, but only if the issuing company has been listed for at least 3 months at the time of exercise or vesting, or a “valuation document” is given to participants no later than 14 days prior to exercise or vesting.  For these purposes, a valuation document is either an Australian-compliant disclosure document (e.g., a prospectus), an independent expert’s report on the value of the underlying shares, or a copy of an executed agreement under which shares in that class are being acquired by a third party on arm’s length terms;
  • if the company prepares audited financial statements then they must be included with the offer document. For other unlisted companies, the offer document must include special purpose financial statements for a 12-month period, which will add an additional cost to compliance with the relief;
  • the offer document must include a directors’ solvency resolution that is made within one month before the offer (this is a resolution that there are reasonable grounds to believe that the company will be able to pay its debts as and when they fall due);
  • while the incentive right or option has not yet vested or been exercised, there is an ongoing obligation to provide financial statements if requested by a participant; and
  • as was the case under [CO 03/184], loans are not permitted in connection with offers made by unlisted companies.


These conditions mean that unlisted start-up companies could find it difficult to take full advantage of the recently announced tax concessions for employee share and option schemes that are planned to come into effect from 1 July 2015.


Interaction With The “20/12” Exemption


ASIC has also made class order [CO 14/978] so that offers under the new employee incentive plan relief will not count towards the issuer’s ability to make personal offers of securities not exceeding 20 issues in 12 months and not exceeding AUD 2m (USD 1.7n) in total.  This is a welcome addition to the new class orders for listed and unlisted companies that makes the relief more versatile.


Baker McKenzie


For further information, please contact:


Ben McLaughlin, Partner, Baker & McKenzie

[email protected]


Jonathan Kelt, Baker & McKenzie

[email protected]


Maria Pawelek, Baker & McKenzie

[email protected]


Jeanie Chang,Baker & McKenzie

[email protected]


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