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  • ESS legal requirements

    There are many legal and regulatory requirements to consider in implementing an employee share scheme (ESS). You must be aware of the following:

    • the provisions of the Corporations Act 2001External Link relating especially to offers of shares (in particular, sections 706, 708 and 710 – 716) including disclosure requirements and exemptions
    • for listed companies, the relevant stock exchange listing rules (ASX listing rules)
    • the company constitution
    • the provisions of the Corporations Act restricting companies from dealing with their own shares
    • taxation law issues, including income tax, capital gains tax, pay as you go withholding and fringe benefits tax
    • the provisions of the Corporations Act relating to financial services regulation, and the rules regulating financial advice (unless you have an exemption from this by using section 708 of the Corporations Act or Australian Securities and Investments Commission (ASIC) Class Order exemptions for ESS)
    • other provisions of the Corporations Act relating to licensing, advertising, hawking, managed investment schemes and on-sale of financial products
    • accounting standards
    • privacy legislation.

    What disclosure/prospectus requirements are associated with ESS?

    Where you make an ESS offer, a range of obligations under the Corporations Act may be triggered.

    The disclosure requirement

    The Corporations Act requires that if you make an ESS offer, you must also give the employee a disclosure document, unless an exemption in that Act applies or you are relying on the relief in the ASIC Class Order [CO 14/1001]: Employee incentive schemes: Unlisted bodies (ASIC CO 14/1001).

    Disclosure exemptions

    There are limited disclosure exemptions that may apply for offers of Options to employees under the Employee Option Plan, which include (among others):

    • offers to senior managers – see subsection 708(12) and the definition of 'senior manager' in section 9 of the Corporations Act, and
    • small-scale offers – offers to up to 20 persons not exceeding $2 million (calculated by reference to the amount payable on both grant and exercise of the option) in any 12 month period (see subsections 708(1)–(7) for more detail).

    Disclosure documents

    A disclosure document is a term used to describe all regulated fundraising documents for the issue of securities. All disclosure documents must be lodged with ASIC before an offer can be made under the ESS. The simplest type of disclosure document that can be used to make an offer under an ESS is an offer information statement (OIS). A prospectus, which has a more comprehensive content requirement than an OIS, may also be used.

    An OIS must include, among other things an audited financial report prepared in accordance with the accounting standards, which covers a 12 month period and with a balance date that occurs within the last six months before an offer is first made under the OIS.

    A prospectus must contain all information that investors and their professional advisors would reasonably require to make an informed investment decision. Among other things, it must explain the company's financial position, performance and prospects.

    See also:

    ASIC CO 14/1001 and offer documents

    ASIC CO 14/1001 reduces the compliance burden for unlisted bodies in establishing their ESS by providing conditional relief from the disclosure, and other requirements of the Corporations Act. One of the conditions of ASIC CO 14/1001 is, when making an offer under an ESS, the company must provide an Offer Document that complies with the requirements of ASIC CO 14/1001. Each offer must also be valued at no more than $5,000 per employee and for no more than nominal monetary consideration.

    For more information on the conditions to be satisfied to rely on the relief in ASIC CO 14/1001, including the content of Offer Documents, see the section G of ASIC Regulatory Guide 49: Employee incentive schemes.

    Other requirements of the Corporations Act

    The Corporations Act also contains the following provisions that may be relevant, depending on how your ESS is implemented:

    • The requirement to hold an Australian financial services licence for the incidental provision of financial services (such as giving general advice, dealing in financial products or providing custodial or depository services) in connection with the ESS.
    • The prohibition on advertising an offer or an intended offer where that offer needs a disclosure document.
    • The prohibition on the issue of Options or shares arising out of unsolicited contact with investors (which is referred to as hawking).
    • The requirement to register a managed investment scheme for an ESS that has a contribution plan.
    • The restrictions on the on-sale of financial products issued without disclosure within 12 months of their issue.

    If your offer is an 'eligible employee share scheme' (defined in section 9 of the Corporations Act) and is made using a disclosure document, there are some limited exemptions from these provisions. If you are relying on ASIC CO 14/1001, you are generally not required to comply with these provisions.

    See also:

    Last modified: 17 Jun 2019QC 59317