13 Nov 2014

ASIC's new policy on Employee Incentive Schemes now in operation

by David Landy, Stuart Byrne, Brendan Groves, Andrew Hay, Mark Paganin

Class Order relief for listed bodies will be extended to schemes offering non-share products, such as performance rights, options over stapled securities, CDIs and ADRs.

Employee incentive schemes will be easier to implement under a new ASIC policy which started on 30 October 2014.

Previously, a limited range of schemes were automatically exempted from the disclosure, licensing and advertising requirements of the Corporations Act (by ASIC Class Order). Other schemes could get relief, but only if they individually applied to ASIC (a process which involved additional costs and time).

ASIC has now widened the classes of scheme which are exempted by Class Order, and modified the relief granted by the Class Order. One of the biggest changes is that Class Order relief for listed bodies will be extended to schemes offering non-share products, such as performance rights, options over stapled securities, CDIs and ADRs. Other significant changes for listed bodies include:

  • a three-month (rather than 12 month) minimum quotation period for the products offered under the scheme;
  • extending Class Order relief to cover schemes offered to contractors and casual employees;
  • new "clear, concise and effective" requirements for scheme offer documents;
  • replacing the requirement to lodge offer documents with ASIC with a requirement to lodge a reliance notice with ASIC


Until now, ASIC Class Order 03/184 gave conditional relief from the following provisions of the Corporations Act to certain bodies who provided an employee share scheme:

(a)     the requirement to provide a disclosure document for offers under the scheme (disclosure relief);

(b)     the requirement to hold an AFS licence for the provision of general advice when circulating and explaining the terms and conditions of the scheme (licensing relief);

(c)     the prohibition on advertising or publicity before an offer or intended offer (advertising relief); and

(d)     the prohibition on the issue or sale of financial products arising out of unsolicited contact with employees (hawking relief).

The new ASIC Class Orders greatly expand the available range of relief.

What financial products can be offered by listed bodies?

ASIC's previous relief applied to offers for the issue or sale of fully paid shares in the issuer, options for the issue or transfer of these shares, units in these shares and fully paid stapled securities (comprising two or more financial products one of which is a share).

The new relief broadens the financial products covered by the relief to include:

  • performance rights (or, in ASIC's preferred terminology, "incentive rights") - including rights to receive a cash amount that is equivalent to the value of an eligible financial product and/or any increase in their value, and rights to receive a cash amount equivalent to the dividends or distributions paid to holders of eligible financial products. Eligible financial products for incentive rights include fully paid shares quoted on ASX or an approved foreign market, depositary interests, MIS interests traded on ASX and fully paid stapled securities quoted;
  • stapled securities quoted on ASX - no share component required
  • options over and units in stapled securities quoted on ASX;
  • fully paid interests in registered managed schemes quoted on ASX;

CDIs and ADRs - depository interests quoted on ASX or an approved foreign market.

ASIC has stated that cash payments made under employment or employment-like arrangements - where the value of the cash payment is determined by measures unrelated to underlying financial products, such as a volume-based sales commission or bonus—are not intended to be regulated by Chapter 7 of the Corporations Act, and so no relief is required.

Period of Quotation required for listed bodies

In order to be eligible for this relief, the relevant financial products must have been quoted for at least three months without having been suspended for more than five trading days in the shorter of the period in which the financial products have been quoted or the 12 months before the offer is made. This contrasts with the previous requirement that the product must have been quoted for at least 12 months and not suspended for more than 2 trading days.

No holding requirement

ASIC originally proposed that no more than 75% of the value of an employee incentive scheme could fully vest within 12 months. This was intended to promote the use of employee share schemes as a means of ensuring a long-term mutual benefit between issuer-employers and their employees.

The final relief granted by ASIC does not include this requirement, in part because many schemes build in a contingency for early vesting for unexpected events such as death, disability and redundancy, which would then breach the proposed requirement.

Disclosure to participants and ASIC

Although eligible schemes enjoy an exemption from the requirement to produce a prospectus, this relief is still conditional upon some disclosure requirements. Offers to employees much be accompanied by an offer document that contains prescribed information including:

  • the terms of the employee share scheme; and
  • general information about the risks in acquiring and holding the relevant product.

In addition, the offer document must be worded and presented in a clear, concise and effective manner.

The previous requirement for the body relying on the relief to provide offer documents to ASIC has been replaced with a requirement to notify ASIC within one month of making its first reliance on the relief. ASIC will be able to able to demand production of all the offer and ancillary documents provided to employees under the scheme.

Relief available to unlisted bodies

ASIC also provides relief for employee incentive schemes offered by unlisted bodies where the body:

  • offers $5,000 worth of full paid voting ordinary shares for no more than nominal monetary consideration (which can be made annually);
  • offers options over and/or performance rights relating to ordinary shares for no more than nominal monetary consideration (or if there is more than nominal monetary consideration payable for the option/incentive right to be exercised/vest, the option must not be exercised or the incentive right must not vest unless the body satisfies the minimum quotation period (for listed bodies) or a valuation document is given to the participants no later than 14 days prior to exercise or vesting);
  • makes such offers in an offer document, presented in a clear, concise and effective manner; and
  • does not offer more than 20% of new equity under employee incentive plans in a three year period.

What structures can be used by listed bodies when making offers?

In regards to trust structures, contribution plans and loan arrangements, the new relief:

  • covers offers of certain specific financial products (excluding options and performance rights) that are held on trust and are allocated to specific participants, and includes underlying eligible products held in a pool for participants generally on an unallocated basis;
  • imposes a new condition, for products held on trust on an unallocated basis, that no more than 5% of the issuer's eligible products to which voting rights attach may be held on trust for participants;
  • expands the definition of "contribution plan" to include salary sacrifice arrangements of future earnings as well as deductions from taxed salary amounts;
  • imposes a condition that loans must be interest- and fee-free, and either no-recourse or subject only to forfeiture of the relevant product; and
  • prohibits the use of contribution plans and loan arrangements by unlisted bodies for schemes relying on the relief.

Who can receive offers?

Previously, ASIC's relief for employee incentive schemes only applied to offers made to full-time or part-time employees and directors of the issuer or of an associated body corporate.

The new relief expands this list considerably, to include:

  • contractors who perform work under a contract for the issuer (or an associated body corporate of a listed issuer or wholly owned subsidiary of an unlisted issuer) where the individual's hours of work are the equivalent of 40% or more of a full‑time position with the issuer;
  • casual employees employed by the issuer (or an associated body corporate of a listed issuer or wholly owned subsidiary of an unlisted issuer) to work the equivalent of 40% or more of a full‑time position with the issuer;
  • "prospective participants" - persons who have received an offer of an eligible directorship, employment or contract work.

An ASIC proposal to make the application of the relief to non-executive directors subject to additional conditions (including that the acquisition of financial products was not subject to a condition linked to the performance of the issuer, the director must contribute their own funds for the acquisition and the scheme must not involve a loan or other financial assistance) has been dropped. ASIC has, instead, opted merely to issue a warning that schemes with performance-based features or conditions should not be offered to non-executive directors, and that directors' electing to receive a portion of their fees in the form of shares without any performance conditions would better satisfy "best practice" corporate governance principles.

On sale relief

ASIC has:

  • extended the on-sale relief (previously provided under ASIC Class Order [CO 04/671]) to cover offers under employee incentive schemes of all eligible products to all participants; and
  • provided disclosure relief and additional on-sale relief for offers of eligible products to the trustee of an employee incentive scheme (and which are subsequently transferred to a participant).

Who can make offers?

ASIC's previous disclosure relief applied to offers by bodies listed on ASX or an approved foreign market (and their associated bodies corporate), as well as made by unlisted bodies.

The new relief applies to offers made by a listed issuer and its associated bodies corporate and expands the relief available to unlisted bodies to include offers made by wholly-owned subsidiaries.

Share capital limit of 5% for listed bodies

The previous relief imposed a 5% share capital limit on the amount of capital that may be issued under the relief.

Under the new relief offers under an employee incentive scheme can only be made where the body reasonably believes it will not exceed the 5% issue limit, when the calculation includes:

  • the number of underlying eligible products that may be issued under the current offer; and
  • the number of underlying eligible products that have been or may be issued as a result of offers made under an employee incentive scheme at any time during the previous three years in reliance on ASIC relief.

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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.