Guerdon Associates has lodged its submission on ASIC’s proposals to expand the relief from the Corporations Act disclosure, licensing and hawking provisions. This relief is currently provided in relation to employee share schemes under ASIC Class Order CO 03/184.

Details of the ASIC proposals and our initial response to them were set out in our December newsletter article (see HERE).

We support many of the proposals, on the basis that they reduce the regulatory requirements for employers wishing to offer incentive schemes to their employees. We have, however, made some specific comments and suggestions on a number of the proposals – these are set out in brief below.

We have also suggested that ASIC should re-examine its approach to employee incentive schemes. While there are certain instances where an incentive scheme involves an ‘investment’ decision by the employee – e.g. a salary sacrifice, or ‘contribution’ type plan – the vast majority of schemes are quite distinct from the types of arrangements normally regulated under the Corporations Act, and do not involve any risk of financial detriment to employees. In such cases, we suggest ASIC should issue broad class order relief to clarify that Chapters 6 and 7 of the Act have no application to employee incentive schemes that do not require a genuine investment by the employee. This simple approach would minimise compliance costs for employers offering incentive schemes.

Comments on the ASIC proposals

Holding requirement

The proposed requirement that participants can receive no more than 25% of the entitlement under an offer within 12 months of the offer being made in order ‘to ensure the relationship of interdependence is observed’ would, in our view, unreasonably limit the design of incentive plans eligible for class order relief.

In practice, it is likely that most plans will meet the proposed ASIC condition, because this suits the arrangements of the parties involved. But different vesting scales will not necessarily mean a lesser level of ‘interdependence’. A plan that vests 50% immediately and the balance 12 months later, for example, would also create a culture of interdependence between the employer and the employee.

Imposing this condition would require an employer who wishes to vest more than 25% within the first 12 months to make an application to ASIC for specific relief – resulting in an increase to the costs of establishing an incentive plan as well as additional administration for ASIC. We query whether ASIC would refuse relief, when this would only result in employees missing out on a benefit.

Performance rights

The requirement that a ‘performance right’ must ‘automatically vest’ if service or performance conditions are met is unnecessary, and we have suggested it should be removed. While not as common, some company plans require the participant to ‘exercise’ the performance right as a pre-condition to a share being allocated. The proposed definition would exclude these instruments.

We also consider it unnecessary to specify that there must be ‘vesting conditions’ attached to the offer for a right to qualify as a performance right within the meaning of the Class Order. This is a matter for the company to determine. It is also inconsistent with the definition of other ‘financial products’, which do not impose a similar condition to qualify for relief.

We have suggested ASIC reconsider using the term ‘performance right’. Vesting conditions attaching to a right may be service based only, and not be contingent on performance. The term ‘share right’ would be more appropriate terminology, which is also consistent with Division 83A of the Income Tax Assessment Act 1997.

Offers to non-executive directors

While it is important that relief is provided for non-executive directors (NEDs) to participate in equity-based incentive schemes, the proposed specific conditions of relief suggest that ASIC is seeking to impose its own governance perceptions in relation to NED equity plans. In our view, the basic condition for relief should simply be that the offer is made by a company to a NED.

In our view, the same definition of ‘financial products’ should be used for offers to NEDs as for offers to employees. Limiting relief to quoted shares, depository interests and stapled securities does not recognise that a significant component of the Australian economy has been dependent on the entrepreneurial spirit of directors willing to build start-up exploration companies into major resources companies and receive options in lieu of cash fees. It is also contrary to moves to free up the taxation and regulatory treatment for equity plans offered by start-up companies.

Similarly, the proposal that relief be conditional upon directors contributing their own funds (including by way of fee sacrifice) to acquire the financial products would unreasonably limit the circumstances in which the class order relief would be available. For example, it would not apply where a small company with limited cash resources wishes to provide remuneration in the form of options to attract and retain non-executive directors with the skills to give the company the best chance of success (ASIC should be encouraging this, to protect the interests of shareholders in the company).

The proposed condition that offers for NEDs must not be subject to a performance condition should be removed. While we agree that it is generally undesirable from a governance perspective for NED remuneration to be subject to a performance condition, because this may compromise director independence, we are strongly of the view that the appropriate structure of NED remuneration is a matter for the issuing company and its shareholders to determine. Further, such a condition is not required to protect the interests of the NEDs.

Offers by unlisted bodies

We have suggested the proposed $1,000 per annum limit on offers of ordinary shares for little or no monetary consideration should be removed, or at least significantly increased. Such a limitation will restrict the ability of cash-poor employers to attract and retain potentially high value-add individuals. This would be a major concern for start-up companies wishing to attract talent.

Our full submission can be seen HERE.

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