Further proposed ESS changes
04/02/2022
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Treasury Consultation

On 20 December Treasury released a Consultation paper on the proposed changes to the relief provisions of the Corporations Act 2001 (the Act) for employee share schemes (ESS).

If the proposed legislation is passed in its current form, it will mean companies offering ESS, where participants do not have to pay or borrow to participate (either to acquire or as an exercise price) will not have to consider or comply with any requirements under the Act in respect of the ESS.

The Government is seeking stakeholder views on exposure draft legislation that removes regulatory barriers for companies that want to offer an ESS. This exposure draft legislation builds on the proposals that were released in August 2021 and that Guerdon Associates wrote about (see HERE).

In summary, if an ESS is eligible for relief under the proposed legislation, the Act’s requirements for offering shares and financial products will not apply. This will mean:

  • The company will not require an Australian financial services licence (AFSL);
  • General financial advice can be provided in relation to the ESS without an AFSL;
  • The restrictions on advertising and hawking securities and financial products in the Act do not apply to the ESS; and
  • The disclosure requirements under the Act do not apply to offers under the ESS.

ESS offers by listed companies can generally meet the regulatory exemptions for the disclosure, advertising, hawking and related requirements. These regulatory requirements created great difficulty, complexity and, consequently, costs for unlisted companies offering ESS. So, the proposed changes are welcome.

The changes relative to the prior consultation include:

  • regulatory relief will be contingent on offers including certain terms – including terms limiting the size of purchases and provision of disclosure documents;
  • Changing the limit on the size of purchases to a monetary cap where an employee can outlay $30,000 per year (which can be accrued for unexercised options over a 5‑year period, up to a maximum of $150,000) plus 70% of dividends and 70% of cash bonuses, for an unlisted company ESS offer;
  • Removing the limit on the size of purchases for ESS offers contingent on a liquidity event, and the sale or listing price is higher than what the employee will pay;
  • Limiting loans to employees who are not existing shareholders;
  • Extending regulatory relief to certain discretionary trusts, consistent with existing relief for senior managers;
  • Extending regulatory relief in respect of free offers to independent contractors; and
  • Including ASIC exemption and modification powers, and regulation making powers.

The consultation paper is brief and poses three questions:

  • Is there a need to restrict the extent of capital raising from employees? If so, on what basis?
  • If capital raising from employees should be restricted, is the issue cap the appropriate regulatory tool for doing so?
  • Should an alternative regulatory tool be considered instead?

Guerdon Associates is supportive of the legislation, only suggesting that the $30,000 ceiling be lifted or eliminated. We also suggest a sunset clause for requiring legislative renewal after 5 years.

The exposure draft legislation, explanatory memorandum and consultation paper can be found HERE.

See Guerdon Associates’ submission HERE.

© Guerdon Associates 2022
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