Who can participate in offers?
To be eligible for the regulatory relief under the new rules, the offer may only be made to specified primary participants or certain related persons to a primary participant (such as certain immediate family members, controlled bodies corporate or a related self-managed superannuation fund).
A primary participant is an existing (or prospective) employee of, director of, or person who provides services to:
(a) the body corporate issuing the ESS interest or an associated entity; or
(b) the responsible entity of the listed scheme to which the ESS relates or an associated entity.
An associated entity includes a subsidiary and controlled entities. Casual employees and contractors will no longer be required to meet a specified percentage of a full time equivalent threshold to be eligible to participate.
What financial products can be offered?
To be eligible for the regulatory relief under the new rules, only certain financial products may be offered under the ESS (ESS Interests). For listed body corporates and listed registered schemes, these ESS Interests have not changed.
The ESS Interests for a listed body corporate are:
(a) a fully paid share that is in a class of shares that are able to be traded on an eligible financial market;
(b) a beneficial interest in a fully paid share where the interest is in a class of interests that is able to be traded on an eligible financial market;
(c) a fully paid share which can be converted into a beneficial interest (or vice versa) without charge or for a nominal fee, where either the beneficial interest or the share is in a class that is able to be traded on an eligible financial market;
(d) a unit in, an incentive right (which includes a dividend equivalent right), or an option to acquire, any of the above interests; or
(e) a fully paid stapled security that is in a class of stapled securities that is able to be traded on an eligible financial market consisting of any of the above interests, or an interest in a listed registered scheme.
The ESS Interests for a listed registered scheme are:
(a) an interest in a listed registered scheme that is of the same kind as an interest in the scheme which is able to be traded on an eligible financial market;
(b) a unit in, an incentive right (which includes a distribution equivalent right), or an option to acquire, any of the above interests; or
(c) a fully paid stapled security referred to in paragraph (e) above.
Permitted trust structures
To be eligible for the regulatory relief under the new rules, where an ESS offer under which ESS Interests may be issued or transferred by a trustee of a trust, the trust deed of the trust must satisfy the following requirements:
(a) activities of the trustee (as trustee of the trust) must be limited to managing the ESSs of the issuer;
(b) the trustee must maintain written records of the administration of the trust;
(c) the trustee must not charge any fees or charges for administering the trust, other than reasonable disbursements charged to the trust and amounts charged to the issuer; and
(d) if the trustee is an associated entity of the issuer, the trustee may only exercise voting rights associated with the ESS Interests in accordance with the instructions of the participants or consistent with the trustee's fiduciary duties.
Under the new rules, there is no longer a percentage limit on the number of ESS Interests that the trustee may hold.
Permitted contribution plans
The new rules allow for the participant (the Contributor) to make regular payments or elect to have regular deductions made from their wages or salary for the purposes of acquiring the ESS Interests under an ESS offer (Contribution Plan). In order to be eligible for the regulatory relief under the new rules, the Contribution Plan must satisfy the following requirements:
(a) the Contributor must agree in writing to the terms of the Contribution Plan before participating in the plan;
(b) before acquiring ESS Interests under the ESS offer, the payments or deductions under the Contribution Plan must be held on trust in an account with an Australian-authorised deposit-taking institution which is solely kept for that purpose;
(c) the Contributor may elect to discontinue the payments or deductions under the Contribution Plan at any time; and
(d) if the Contributor elects to discontinue, within 45 days of the election any deductions from salary or wages must cease and all deductions and payments standing to the credit of the Contributor, and any interest, must be repaid to the Contributor.
Where the ESS Interests are acquired by a trustee for the ESS participant using contributions, it is no longer required under the new rules that the participant has the right to direct the trustee how to vote (if there are voting rights) and has a right to receive dividends from the ESS Interests acquired with the contributions.
Permitted loan arrangements
If the ESS offer provides for a loan to ESS participants for the purposes of acquiring ESS Interests under the offer (Loan), the Loan must be offered on the following terms (which remain unchanged):
(a) the Loan has no interest or fees payable; and
(b) in the event of default in payment of the Loan, recourse is limited to forfeiture of the ESS Interests acquired using the Loan.
The borrower under the Loan must be the participant who will acquire the ESS Interests offered under the ESS.
Issue Cap
If the ESS requires payment to participate, 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.
The Issue Cap is calculated based on the maximum number of shares or interests in a registered scheme that the listed entity may issue (directly or indirectly) as a result of the ESS offer and that have been issued, or could have been issued, under ESS offers made during the previous rolling three years (ending on the date of the ESS offer). For stapled securities, the issue cap must be satisfied in regards to each issuer.
The percentage limit of the Issue Cap is 5% for listed entities. However, under the new rules, if the constitution of the issuer specifies a percentage limit, that limit will apply instead.
Required ESS disclosure
If the ESS requires payment to participate, an ESS offer must be made in, or be accompanied by, an ESS offer document. An ESS offer document must:
(a) include either the terms of the ESS offer (and any associated trust, contribution plan or loan arrangement) or a summary of those terms with a statement that, on request, a copy of the full terms will be provided to the ESS participant;
(b) include an advice warning and a general product risk warning;
(c) state the application period during which the participant may accept the ESS offer; and
(d) state the acquisition price of the financial product (or how it will be determined where it will be determined at a future date) and how the participant may ascertain the market price at a future date.
Under the new rules, the ESS offer document must also include, or direct the participant to, any Australian compliant financial product disclosure document prepared by the issuer in the 12 months before the start of the application period.
Under the new rules, there is no longer a requirement to lodge with ASIC a notice of intention to rely on the regulatory relief.
Required ESS terms
To be eligible for the regulatory relief under the new rules, the terms of an ESS offer must address new requirements. These include:
(a) an ESS participant cannot acquire an ESS Interest until 14 days after receiving the required ESS offer document and information;
(b) the ESS offer document and any supporting documents must not include any misleading or deceptive statements or omissions;
(c) certain specified persons (including directors of the issuer and persons named in the offer with their consent) are required to inform the issuer if they become aware of any misleading, deceptive, out of date, omitted or otherwise materially incorrect part of the offer document or supporting documents; and
(d) a liability regime under which an ESS participant who suffers loss or damage from an out of date or misleading or deceptive statement or omissions, or a failure to provide required supporting documents, can recover damages from specified persons (including the issuer and directors of the issuer). The liability regime may limit liability in certain circumstances, including where the persons establish a due diligence type defence, did not know that the statement was misleading or deceptive or was unaware of a new circumstance that has arisen during the application period.
Dealing with ESS application money
Application money received from ESS participants must now be held in trust until the ESS Interests are issued or transferred, or the money is returned to the participant.
New ESS related criminal offences
There are new criminal offences under the new rules. These include:
(a) making an ESS offer or distributing an application for an ESS offer if the ESS documents or supporting information contains a misleading or deceptive statement, an omission that causes the document to be misleading or deceptive, or does not reflect a new circumstance that has arisen during the application period for the offer, where the misleading or deceptive statement or omission or the new circumstance is materially adverse from the point of view of the ESS participant; and
(b) certain persons (including directors of the issue and persons named in the offer with their consent) failing to inform the issuer if they become aware of any misleading, deceptive, out of date, omitted or otherwise materially incorrect part of the offer document or supporting documents.
There are specified defences to the offence in (a) above, including where the person made all reasonable inquiries, and having made such inquiries did not know the statement was misleading or deceptive or did not know a new circumstance had arisen, or placed reasonable reliance on another person, or the relevant documents were updated as soon as reasonably practicable.
RELATED KNOWLEDGE
Which listed entities can make offers?
The new rules will apply to entities included in the official list of:
(a) an Australian financial market operated by an Australian market licensee, such as the Australian Securities Exchange; or
(b) a foreign financial market determined by the Australian Securities and Investments Commission (ASIC).
The foreign financial markets are expected to continue to include specified North American stock exchanges (including those in New York and Toronto), specified European stock exchanges (including those in London, Rome, Amsterdam, Brussels, Lisbon, Paris, Frankfurt and Bern) and specified Asian / South African exchanges (including those in Tokyo, Hong Kong, Singapore, Malaysia, New Zealand and Johannesburg).
The new rules will no longer require that the ESS interests of the listed entity have been traded for 3 months before the offer is made; nor require that those financial products have not been suspended for more than 5 days of trading over the previous 12 months.
New rules will come into effect on 1 October 2022 affecting how offers by listed entities of securities and other financial products under employee share schemes (ESS) are regulated under the Corporations Act. The new laws will make it easier to incentivise employees with equity in a listed entity where payment, or borrowing funds, to participate in the ESS is not required.
Key points
- Commencement Date is 1 October 2022.
- If an eligible ESS does not require payment, or borrowing funds, to participate, it will generally not be required to comply with the financial product disclosure, financial product design and distribution, and financial services licensing requirements of the Corporations Act (Disclosure & Licensing Laws). However, any associated trust will need to comply with specified requirements.
- If an eligible ESS does require payment, or borrowing funds, to participate, the offer will need to comply with an issue cap, include specified streamlined disclosure and contain required contractual terms. Any associated trust, contribution plan and loan arrangement will need to comply with specified requirements.
- Applications to acquire eligible ESS interests cannot be made until 14 days after receiving the required ESS offer document and information. ESS application money must be held in trust until the ESS interests are issued or transferred or the money is returned to the ESS participant.
- New ESS related criminal offences have been introduced regarding misleading or deceptive statements or omissions, from ESS offer documents or supporting information, and regarding certain persons failing to inform the issuer if they become aware of a misleading or deceptive statement or omission in an ESS offer document or supporting information.