ASIC set to broaden relief for employee incentive schemes
02/12/2013
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ASIC has released proposed new rules by which employers will be able to obtain automatic relief from the prospectus and other Corporations Act requirements for offers under “employee incentive schemes”. The new rules are to be introduced through a new Class Order and Regulatory Guide that will replace the current Class Order [CO O3/184] “Employee share schemes” and “Regulatory Guide 49″ in the first half of 2014.

Overall, this is very good news for both Australian and overseas company boards and their management in having to deal with the complexities of employee equity plans.

ASIC’s underlying policy objective remains the same – facilitating employee incentive schemes by relieving companies from their obligations under the Corporations Act in relation to certain disclosure, licensing and hawking provisions, provided that appropriate protections are in place to minimise risk for employees.

The proposals do this more effectively than the current class order exemption. This should result in less red tape, lower legal and consulting fees, and quicker implementation of what are now becoming fairly standard equity incentive plan features.

Highlights include:

  • Performance rights, indeterminate rights, CDIs (Australia and UK) and ADRs (US) are all now clearly included.
  • The Class Order would be extended to casual employees and contractors where they meet certain conditions, and also prospective employees.
  • Lodgment of documents has been simplified. Completion of a standard form is needed only at the time of the first offer (provided the offer does not significantly change) and there is no need to lodge sample materials.
  • The Trust exemption now includes the concept of an unallocated pool.
  • There is clarification about the “5% in 5 year” share capital limit and it is extended to include the new security types.

We provide more details the proposals below.

A key proposal is to expand the classes of financial products that may be offered. Many companies have been relying on the existing class order relief for offers of share rights on the basis that they are akin to a zero priced option. ASIC rejects this characterisation but has included “performance” rights in the category of “eligible financial products”.

Performance rights will, be broadly defined under the new class order. Reflective of recent trends, it is intended that offers of performance rights may have a cash-out alternative. They may incorporate the value of dividends or distributions paid over the performance period. They also allow for “cashless exercise” of options.

Other important changes include:

  • For listed entities, clarifying that relief extends to offers being made by ‘associated bodies corporate’, rather than the narrower Corporations Act concept of ‘related bodies corporate’.
  • Offers can also be made by unlisted bodies (or their wholly owned subsidiaries) although, interestingly, relief for offers of shares is capped at a maximum value of $1,000.
  • Expanding the category of eligible recipients to include casual employees and contractors (provided they have been employed or working under contract for at least 12 months for a pro-rata full time equivalent number of hours of at least 40% and 80%, respectively).
  • Prospective employees are also included, providing the offer is made under an existing scheme and acceptance of the offer is conditional on the employment offer being accepted. This will be helpful for key employee recruitment.
  • Providing greater flexibility around the structure of incentive schemes to better reflect market practice by expressly covering situations where the financial products are held in a ‘pool’ for participants on an unallocated basis. Companies will need to review current trust arrangements and documentation to ensure the structure meets the conditions of the new class order. 
  • Reducing the administrative burden associated with requiring companies to provide template offer documentation to ASIC for each offer, by requiring only lodgment of a standardised form containing specific information regarding the scheme terms upfront or where there is substantial amendment.

Overall, the proposed changes for offers to employees will provide welcome clarity on a number of complex issues and also reduce the need for companies to apply for case-by-case relief for now commonly arising issues that are not covered by the current class order.

That said there are areas in which ASIC could be said to be “straying” too far into governance territory regarding remuneration design and policy. In particular, ASIC proposes to exclude offers to non-executive directors from the general class order on the basis they do not hold “salaried employment”. Instead, ASIC is proposing specific conditions for relief for offers to non-executive directors – including making it a condition for relief that such offers are not subject to a performance condition (because this compromises independence) and that directors contribute their own funds (including by way of fee sacrifice) to acquire the financial products.

Further, the types of financial products that may be offered to non-executive directors would be limited to shares or stapled securities – that is, the relief will not extend to performance rights or options. This proposal does not recognize that a significant component of the Australian economy has been dependent on the entrepreneurial spirit of directors willing to re-make start-up exploration companies into major resources companies and receive options in lieu of cash fees. It is also contrary to support given by the Government and Opposition to free up equity plan regulation for technology start-ups.

Similarly, the requirement that no more than 25% of the entitlement under an offer can vest to employees within 12 months of the offer being made in order “to ensure the relationship of interdependence is observed” does not cater to market requirements.

The proposed new rules are set out in a consultation paper ASIC released on 14 November (see HERE). ASIC is seeking comments on the proposals by 31 January 2014.

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