A recap – the Corporations Act 2001 has been amended to include new Division 1A of Part 7.12 that has operated with effect from 1 October 2022 to make it easier for employers to offer equity to their employees and certain contractors under Employee Share Schemes (ESSs). We described the amendments HERE and HERE.
The new Division 1A has been designed to replace the administrative relief provided by ASIC under Class Order 14/1000 (for listed companies ) and Class Order 14/1001 (for unlisted companies) that have been relied on by listed and unlisted companies when granting equity to their employees.
In last month’s newsletter we noted that the 12 month on-sale ban that was given administrative relief through the Class Orders had not been replicated in Division 1A and that issues should be deferred until ASIC resolved the matter. This article explains that ASIC is providing temporary relief so that companies do not need to defer the grant of equity for this reason.
The Consultation Paper states that ASIC will not terminate the ability to make new offers under the Class Orders until 1 January 2023 to provide certainty to companies that rely on the class orders. This will give ASIC time to consider feedback on its proposals in the Consultation Paper and make any appropriate legislative instrument for the new ESS provisions. Offers made before the termination date may remain open for acceptance for 13 months.
So, to avoid the on-sale ban, offers can still be made under the Class Orders until 31 December.
When an ESS meets the requirements of Division 1A, the regulatory requirements for companies offering shares and rights to employees will not apply. This means:
- The company does not require an Australian Financial Services Licence (AFSL) to make the grants
- General financial advice can be provided in relation to the ESS without an AFSL being required
- The advertising and hawking requirements of the Act will not apply to the ESS
- The disclosure requirements of the Act will not apply to offers made under the ESS.
The relief from these requirements is currently provided under CO 14/1000 and CO 14/1001.
In effect, the government has sought to bring together into one legislative code the various statutory and administrative exemptions and practices to make the granting of equity easier for employers.
So, why the Consultation Paper?
Consultation Paper CP364 was released by ASIC on 29 September seeking submissions on proposed legislative relief 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 contribution plan requirements.
Secondary sale exemption
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. The latter is generally unlikely, so the current drafting imposes a significant limitation on the employee’s ability to realise value from their vested equity.
The proposed relief is to expand the secondary sale exemption for financial products quoted on a financial market and where the issuer had no on-sale purpose at the time of issue.
The exemption will not be expanded for unquoted ESS interests.
However, the provisions will be modified for unquoted products so that a person acquiring the product from the original recipient can on-sell to other ESS participants of the entity.
Financial information: foreign companies
Some foreign employers with employees in Australia are not required to report under s601CK of the Corporations Act because they operate using an Australian subsidiary. Prima facie, this will make it difficult for them to grant equity to Australian employees under ESS.
It is proposed to modify Division 1A so that foreign companies not registered under the Corporations Act can provide a balance sheet and profit and loss statement prepared in accordance with accounting standards the company is required or permitted to use in its place of origin. This will be acceptable if the foreign company discloses either:
- confirmation that there is no material difference between the financial statements prepared under the foreign standard and the financial statements that would otherwise be required; or
- a reconciliation of the material differences.
Valuation of financial products that are not ordinary shares
Division 1A currently provides that ESS interests may be valued in accordance with an applicable method approved by the Commissioner of Taxation under s960-412 of the ITAA 1997. Currently, the method specified under that provision only covers ordinary shares. For other types of ESS interests, ASIC is proposing legislative relief that allows a company to provide a valuation of the ESS interests in an independent expert report.
Contribution plans and salary sacrifice arrangements
ASIC proposes minor modifications so that salary sacrifice arrangements can comply with requirements for contribution plans. The proposed changes would exempt salary sacrifice payments from:
- the requirement to be held in an account with an Australian authorised deposit-taking institution; and
- the repayment requirement applying to unused contributions if the ESS participant discontinues participation.
ASIC is open for submissions on the proposed relief until 31 October 2022.
Guerdon Associates will be making a submission.
See the CP364 HERE© Guerdon Associates 2023 Back to all articles