ASIC changes to the new employee share scheme regime for unlisted entities

David Landy, Stuart Byrne, Brendan Groves, Andrew Hay, Liz Humphry and Stephanie Daveson
07 Feb 2023
Time to read: 3 minutes

Unlisted entities will no longer be able to make new offers under ASIC’s existing relief for employee incentive schemes in Class Order [CO 14/1001] Employee Incentive Schemes: Unlisted bodies from 1 March 2023.

Unlisted entities offering employee share schemes (ESS) have had a new Australian regulatory regime since 1 October 2022.

As with listed entities ASIC subsequently made changes to the new ESS provisions in Division 1A of Part 7.12 of the Corporation Act to facilitate these offers, with effect from 20 December 2022.

On-selling the ESS interest to another ESS participant

ASIC has made a minor change to the exemption for secondary sales of ESS interests that are issued in connection with an employee share scheme and are unquoted financial products. The exemption now covers subsequent re-sales by ESS participants. This means that a buyer of an ESS interest can on-sell the ESS interest to another ESS participant.

ASIC has clarified that the secondary sale exemption applies to financial products which are an ESS interest issued pursuant another ESS interest (for example, shares issued on the exercise of an option). It has also confirmed that the secondary sale exemption can apply to ESS interests where the original offer for the ESS interests was received outside Australia.

Salary sacrifice into ESS contribution plans

ASIC has clarified the ESS contribution plan provisions to cater for salary sacrifice arrangements (by referring to contributions rather than payments and wage / salary deductions). This reflects the position under the expiring ASIC Class Order [CO 14/1001].

ASIC has exempted salary sacrifice arrangements and complying loan arrangements from the ESS contribution plan requirements for:

  • contributions to be held in an Australian ADI trust account; and
  • contributions to be repaid to the ESS participant when the participant elects to discontinue making contributions.

It has also clarified that the ESS contributions of more than one ESS participant may be held in the same Australian ADI trust account.

Financial information prepared under a foreign standard

If ESS offers are made for monetary consideration, an unlisted body corporate must provide financial information to ESS participants. The financial information (a balance sheet and profit and loss statement) must be prepared in compliance with Australian accounting standards or International Financial Reporting Standards (IFRS).

If a foreign entity is not registered under Part 5B.2 of the Corporations Act (and therefore does not lodge financial statements with ASIC), the foreign entity may now provide such financial information that has been prepared in accordance with a foreign accounting standard that the entity uses in its place of origin or in its principal place of business.

In that case, unless the foreign entity reasonably believes the financial information is prepared in accordance with standards and generally accepted accounting principles applied in the United States of America (US GAAP), the foreign entity must also either:

  • confirm that there are no material differences; or
  • provide a reconciliation of material differences,

between the foreign financial information and the information that would otherwise be required under Australian accounting standards or IFRS.

Valuations of ESS interests

Where an unlisted body corporate offers ESS interests for monetary consideration, certain valuation information must be provided to ESS participants. One of the permitted valuation documents is a valuation that has been prepared consistently with an applicable method approved by the Australian Commissioner of Taxation under section 960-412 of the Income Tax Assessment Act 1997 (Cth).

Given that the only present method approved under that regime relates to ordinary shares of start-ups:

  • ASIC has confirmed that entities which are not start-ups may use the approved method relating to ordinary shares; and
  • ASIC has clarified that ESS interests that are not ordinary shares issued by a company may be valued by an expert (being a person whose profession or reputation gives authority to a statement made by him or her in relation to the relevant valuation). Those expert valuations are subject to the requirement that they are not misleading or deceptive.

Issue cap

For ESS offers made for monetary consideration, the issuer must reasonably believe that the ESS offer complies with an issue limit on the proportion of the issuer's fully paid shares or registered scheme interests which can be acquired under the ESS offers.

ASIC has clarified that when calculating the issue cap, an issuer does not need to take into account ESS interests where:

  • the ESS offer has expired; or
  • the ESS interest itself has expired.

ASIC has also clarified that offers made to ESS participants which are not received in Australia will not need to be included when calculating the issue cap.

Updating disclosures to ESS participants

A person who makes an ESS offer (offeror) must provide each ESS participant with an updated ESS offer document as soon as practicable after becoming aware that the document that was provided has become out of date, or is otherwise not correct, in a material respect.

ASIC has clarified that this obligation only applies if the offeror becomes so aware during the application period for the offer. ASIC has also confirmed that the obligation on the offeror to provide updated documents about options and incentive rights only applies during the period which they can be exercised or vest.

Ending Class Order Relief

ASIC has amended ASIC Class Order [CO 14/1001] so that the financial product disclosure relief for primary offers provided by that class order only applies if the offer is made before 1 March 2023 and is only capable of acceptance until 1 April 2024. The incidental relief (ie. relief from Australian Financial Services licensing requirements, relief from managed investment requirements that may apply to contribution plans, and relief from on-sale restrictions) provided by that class order continues to apply for prior offers.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.