The Australian Securities & Investment Commission (ASIC) proposed legislative relief for Employee Shares Schemes (ESS) to:

• expand the secondary sale exemption for financial products that are quoted on a financial market
• enable unlisted foreign companies to provide financial information prepared in accordance with foreign accounting standards
• allow companies to provide a valuation prepared by an independent expert where they are offering ESS interests that are not covered by a method approved by the Income Tax Assessment Act 1997 (ITAA 1997); and
• ensure salary sacrifice arrangements can comply with the requirements for contribution plan.

ASIC sought and received submissions, including one from Guerdon Associates (see HERE). Generally, we and many others supported the changes.

Consultation Paper CP364 was released by ASIC on 29 September 2022 seeking submissions on proposed legislative relief to ESS schemes under Division 1A Part 7.12 of the Corporations Act 2001 (the Act). A detailed summary of the proposals can be found in our October Newsletter Publication (HERE).

On 20 December 2022, ASIC released ASIC Corporations (Employee Share Schemes) Instrument 2022/1021 to facilitate reliance on the ESS provisions in Division 1A of Part 7.12 of the Act. This Instrument considered feedback from stakeholders in CP364 submissions, and a summary of the modifications made in the instrument is presented below.

Technical relief for salary sacrifice arrangements in contribution plans

Section 1100T currently defines an ESS contribution plan to mean a plan that includes allowing an ESS participant to make regular payments, or to elect to have regular deductions made from their wage or salary, for the purpose of acquiring the ESS interest. The use of the terms “payments” and “deductions” does not explicitly consider salary sacrifice arrangements that are a reduction of pre-tax gross salary. Hence, they are now collectively modified to “contributions”.

The instrument also exempts future gross wages or salary (salary sacrifice arrangements) from the requirement to be held in Australian ADI trust accounts and from the repayment requirement. This makes sense and is in line with our submission.

Issue Cap

Currently, section 1100V provides that the issue cap accounts for ESS interests that “could have been issued” under offers made in connection with an ESS. This has been modified to only include ESS interests that “may be issued” to account for ESS interests where either the offer has lapsed, or the ESS interest itself has expired.

Clarification was also provided that offers made to participants in other jurisdictions will not be included in the calculation of the issue cap.

Financial information prepared under a foreign standard

Subsection 1100X(2) provides that unlisted body corporates  making ESS offers for monetary consideration must provide financial information to ESS participants comprising a balance sheet and profit and loss statement prepared in accordance with IFRS or Australian accounting standards.

Acknowledging the compliance difficulty for foreign entities not registered under Part 5B.2 of the Act, section 1100X is modified so that foreign entities may provide financial information that has been prepared in accordance with accounting standards used in the entity’s place of origin.

Secondary sale of ESS interests

Division 1A currently restricts employees from on-selling within 12 months the shares they acquire from vested ESS interests unless the sale is to another participant in the same ESS.

This has been modified so that unquoted ESS interests may be sold to another ESS participant where the seller either acquired the interest in connection with an employee share scheme, or from another ESS participant.

Section 1100ZD is modified by the instrument to provide a broader on-sale exemption for ESS interests that are issued in connection with an ESS and quoted on a financial market, for example shares acquired from the exercise of the ESS interest. Subject to certain exceptions for ESS interests issued to a trustee, the body who issued the ESS interest must not have an on-sale purpose. ASIC acknowledges this should ordinarily be satisfied given that the offer letter or other circumstances of the ESS offer typically establish that the purpose of the offer is to promote mutual independence, give the ESS participant a stake in the business or similar.

Valuations by an unlisted body corporate

Section 1100X requires certain valuation information to be provided where an unlisted body corporate offers ESS interests for monetary consideration.

This includes a valuation that has been prepared consistently with the approved methods under section 960-412 of the Income Tax Assessment Act (ITAA 1997). Those methods currently only work for ordinary shares valuations.

ASIC’s instrument now modifies the valuation methods so that ESS interests that are not ordinary shares issued by a company may be valued by an independent professional expert.

These changes make the ESS relief even more conducive, making it easier for both public and private companies to implement and operate employee share schemes.

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