ASIC modification of employee share scheme provisions

5 minute read 21.02.2023 Sudharshan Senathirajah, Olivia Gong

This article provides an update on the recent ASIC Instrument that came into force in December 2022 relating to the new employee share scheme division of the Corporations Act.

Key takeouts

ASIC Corporations (Employee Share Schemes) Instrument 2022/1021 (ESS Instrument) expands the regulatory relief under Division 1A (employee share scheme) of Part 7.12 of the Corporations Act 2001 (Cth) (ESS Division).

The ESS Instrument provides clarification on salary sacrifice arrangements, the issue cap, financial information prepared under a foreign standard, period of disclosure and regulatory relief for subsequent sale offers under the ESS Division.

The ESS Instrument allows offers of employee share scheme interests to be made under ASIC Class Order 14/1000 or ASIC Class Order 14/1001 until 1 March 2023.

Following a public consultation in October 2022, the Australian Securities and Investments Commission (ASIC) published ASIC Corporations (Employee Share Schemes) Instrument 2022/1021 (ESS Instrument) which came into effect on 20 December 2022. The ESS instrument aims to facilitate the relatively recently introduced employee share scheme provisions under Division 1A of Part 7.12 of the Corporations Act 2001 (Cth) (ESS Division), in particular, it provides clarification on the following topics:

salary sacrificing arrangements;
the issue cap;
financial information prepared under a foreign standard;
period of disclosure; and
regulatory relief for certain subsequent sale offers of ESS interests.

In addition to the ESS Instrument, ASIC issued ASIC Corporations (Amendment) Instrument 2022/1022 (the Amendment Instrument) to provide guidance on the continuing application of ASIC Class Order 14/1000 (CO 14/1000) and ASIC Class Order 14/1001 (CO 14/1001).

Salary sacrificing arrangement

The replacement section 1100T (meaning of 'ESS contribution plan') introduces a new definition of 'contribution', which includes payments, deductions or other contributions from one or more of gross (before tax) wages or salary, net (after tax) wages or salary and other monies.

Consistent with CO14/1000, the replacement section 1100T also provides that:

the requirement to have the contributions held on trust in an account with an Australian authorised deposit-taking institution; and
the repayment requirement applying to unused contributions if the ESS participant discontinues participation,
will not apply to future gross (before tax) wages or salary, or contributions from a connected loan under section 1100U of the ESS Division.

Issue cap

The ESS Instrument provides modification to section 1100V(1)(b) of the ESS Division. The effect is that the issue cap will now apply to ESS interests that 'may be issued' under offers 'that were both received in this jurisdiction' and made in connection with 'an employee share scheme'. This means offer made in foreign jurisdictions under the ESS will not be captured in the relevant cap.

The modification to the issue cap is only minor as the new ESS Division allows a company to increase its issue cap in its constitution, and ASIC considers the issue cap is sufficiently expansive.

Financial information prepared under a foreign standard

As some foreign companies operate using an Australian subsidiary, it may not be required to report its financials under the accounting standards or international accounting standards (within the meaning of the Australian Securities and Investments Commission Act 2001) (Australian Standards).

In order to address this issue, the ESS Instrument introduces a sperate standard for foreign companies. Instead of complying with the Australian Standards, a foreign company is now allowed to prepare its financial statements in accordance with the standard in its place of origin or its principal place of business (Foreign Standards).

For US companies, there is an additional requirement to provide either:

a confirmation that there is no material difference between the financial statements prepared under the Foreign Standards and the financial statements that would otherwise be required to be prepared under the Australian Standards; or
a reconciliation of the material differences between the Foreign Standards financial statements and the Australian Standards financial statements.

Period of disclosure

The ESS Division introduces a new criminal offence relating to the making of ESS offers which contain misleading or deceiving statements. The ESS Instrument modified section 1100Z(1)(b) of the ESS Division so that the offeror is required to provide each ESS participant with an updated ESS offer document, only if:

the offeror becomes aware of any material out of date or incorrect information in an offer document during the application period; and
the offer document involves monetary consideration and states the period during which the participant may accept the offer.

Regulatory relief for certain subsequent sale offers of ESS interests

In the consultation paper, ASIC indicated that the on-sale provisions under the Corporations Act 2001 (Cth) (Corporations Act) are intended to prevent issuers of financial products avoiding retail disclosure requirements by first issuing the financial products to a wholesale investor for on-sale to retail investors. ASIC recognises the difficulties faced by retail investors where they are issued financial products under a specific exemption from the disclosure requirements, and they may not able to sell the products within 12 months of issue due to the application of the on-sale provisions.

Accordingly, the ESS Instrument now modifies section 1100ZD (regulatory relief for certain subsequent sale offers of ESS interests) so that the disclosure requirements under Part 6D.2, 6D.3 and 7.9 of the Corporations Act do not apply in relation to financial products that are in a class that is able to be traded on a financial market.

However, the relief does not extend to unquoted financial products, as ASIC considers this would fundamentally change the settings determined by Parliament.

Application of CO 14/1000 and CO 14/1001

The Amendment Instrument provides that reliefs under CO 14/1000 and CO 14/1001 may continue to apply to ESS interests offered on or prior to 1 March 2023 and accepted before 1 April 2024. This is a further extension to the previous 1 January 2023 cessation date.

For offers made or proposed to be made under CO 14/1000 and CO 14/1001, please note that the class orders will expire on their sunset date, being 1 April 2025, unless this date is extended by ASIC. Accordingly, unless ASIC extends the sunset date, relief granted under the class orders will cease to apply post 1 April 2025.

MinterEllison is Australia's largest law firm which provides full-service legal expertise to our client in various industries. If you are interested in introducing an employee share scheme to your company or if you would like your company's employee share scheme reviewed for compliance with the new ESS Division, please get in touch with one of our experts.