On 3 April 2019, Treasury released a Consultation Paper on improving employee share schemes (ESS). The purpose of the consultation process is to seek comments on the Government’s proposals. This is to make it easier for small businesses to offer ESS that will attract, retain and motivate employees and enable the employers to grow their businesses.

Treasury is seeking your comments and feedback to be lodged by 30 April. Guerdon Associates will be making a submission that will also be published on our website.

It is well recognised that there are many obstacles and regulatory requirements that make it very difficult for small businesses to implement ESS. The current regulatory framework for ESS is complex and fragmented. Treasury has acknowledged this may discourage businesses – particularly small businesses – from offering an ESS. The Government is proposing to make ESS more attractive and user-friendly by:

• Consolidating and simplifying the statutory exemptions and ASIC class order relief from disclosure, licensing, hawking, advertising and on-sale obligations in the Corporations Act 2001;
• Increasing the value of ESS interests that an unlisted company can offer in a 12-month period from $5,000 to $10,000 per employee;
• Expanding relief for unlisted companies offering an ESS to cover contribution plans, where an employee contributes money or sacrifices salary to acquire the ESS interest; and
• Allowing small companies that cannot come within these exemptions to offer an ESS under a disclosure document lodged with ASIC, without publicly disclosing commercially sensitive financial information, unless they are otherwise obligated to do so.

This is in line with the Government’s announcement on 13 November to implement changes to benefit smaller companies (see HERE). The consultation paper details the current framework and its limitations. The current regulatory framework is:

• complex and fragmented. The various exemptions and relief are scattered across the Corporations Act and in ASIC class orders.
• Too restrictive. The current $5,000 limit and restrictions on contribution plans limits the capacity for unlisted and private companies to offer ESS.
• Requires public disclosure of commercially sensitive information. Small businesses are averse to disclosing such financial information.

The goal of the proposed changes is ultimately to reduce the time and monetary cost to companies of implementing ESS. These reforms are targeted at small and unlisted companies. Consideration is being given to opening it up to listed companies as well. This comes after years of lobbying by Guerdon Associates and others (See HERE and HERE) .

Providing Feedback

Feedback can be provided preferably by email with a post option available and details can be found HERE .

The full consultation paper on the issues with the current framework and proposed reforms can be found HERE .

The proposed reforms

Consolidating and simplifying exemptions and ASIC relief

Treasury has indicated there is a variety of ways to simplify the existing regulatory regime. One consideration is for disclosure, licensing, advertising, hawking, managed investment scheme and on-sale obligations to be moved into the Corporations Act  and consolidated with the existing statutory exemptions for licensing and hawking. This provides users with one complete set of obligations for ease of compliance.

It has listed seven questions seeking views on the complexity and the extent to which that complexity is a barrier to implementing ESS.

Increasing the offer cap per employee

Currently, unlisted companies seeking to make ESS offers without a disclosure document, and relying on ASIC class order relief, can make offers up to $5,000 in value per employee over a 12-month period. This cap is imposed to reduce an employee’s risk, given it is difficult to establish a reliable market price for an unlisted company’s shares and there is no regulated disclosure document.

One alternative being considered is to increase the current limit to $10,000 per employee. This would increase the shareholding per employee, and reduce per employee administrative costs associated with offering ESSs.

Treasury seeks responses to six questions around this proposal that are centred on the potential of risk for employees and the benefits of increasing the cap.

Facilitating the use of contribution plans

Currently unlisted companies seeking to make ESS offers without a disclosure document cannot use contribution plans. These plans involve contributions from either the employee’s remuneration, whether from before-tax funds (salary sacrifice arrangements) or after-tax funds or private funds.

Consideration is being given to allowing the use of contribution plans. Treasury has posed four questions on the benefits and risks and the extent to which there should be increased protections for employees.

Disclosure documents

A possibility is to expand the current exemption so that it applies to a broader range of companies (small companies, not just start-ups) and a broader range of ESS offers. This would enable small businesses offering an ESS to make offers under a disclosure document that would still need to be lodged with ASIC. This would not be accessible by the public. This will enable commercially sensitive financial information to be kept private, to minimise or eliminate any loss of competitive advantage for these businesses.

Three questions are posed on the benefits of expanding the exemption and whether there should be any changes to the scope or availability of the exemption.

Submissions are required by 30 April. The consultation paper can be found HERE.

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