Employee Share Schemes disclosure relief provisions in Bill giving effect to the 2022 Budget announcements

Schedule 4 to the  Treasury Laws Amendment (Cost of Living Support and Other Measures) Bill 2022 (‘main Bill‘) introduces amendments make it easier for businesses to create employee share schemes, which the Explanatory Memorandum described as follows. In essence they are relief from the Corporations Act requirements for disclosure and obtaining a an Australian financial services licence. Going forward, businesses offering employee share schemes, where participants do not have to pay or borrow to participate in an employee share scheme, will not have to consider or comply with any requirements under the Act in respect of the employee share scheme.

Outline of Schedule 4

4.1  Schedule 4 to the  Treasury Laws Amendment (Cost of Living Support and Other Measures) Bill 2022 (‘main Bill‘) introduces amendments make it easier for businesses to create employee share schemes.

4.2  References in this Chapter of this Explanatory Memorandum to ‘the Act’ are to the Corporations Act 2001.

Context of amendments

4.3  An employee share scheme is an arrangement put in place by a business to reward people who contribute to the business, namely directors, employees and service providers (referred to as ‘participants’), with shares or other interests inthe business in exchange for their labour.

4.4  Employee share schemes are often used by start-ups and cash poor businesses to attract employees when the business would be unable to compete with the salary and wages offered by larger and more established businesses.

4.5  Participants are generally offered the ability to join an employee share scheme for a business when they start their employment with the business or reach a new level of seniority within the business.

4.6  Employee share schemes come in many different forms. Employee share schemes can:

• • be offered in addition to salary and wages;
  • be offered to all or only certain groups of people participating in thebusiness (such as senior managers and directors);
  • be in shares or other interests in the business (such as options or units in a trust);
  • involve trust arrangements where a trustee holds the shares on behalf of the participants; and
  • require the participants to make payments or take out loans to participate in the scheme.

4.7  Offers under employee share schemes can take many different forms. Offers can:

• • be created by separate offer rounds where a business offers interests to participants, with a deadline for those participants to accept the offer; or
  • be permanently open to allow people who participate in the business to join the scheme at any time.

4.8  The Act contains a variety of rules for businesses which issue financial products and securities. These rules include a requirement to obtain an Australian financial services licence and restrictions on hawking and advertising and disclosure requirements.

4.9  Financial products and securities offered as a part of certain employee share schemes are excluded from some of these requirements under the Act.

4.10  Further exclusions are currently made in ASIC class orders CO 14/1000 and CO 14/1001. Class Order 14/1000 applies to listed bodies corporate and listed registered schemes and Class Order 14/1001 applies to unlisted bodies corporate.

4.11  The Government is committed to reducing red tape for business, supporting job creation and competitive remuneration, and incentivising employers and employees to work together to contribute to a strong and sustained post COVID-19 economic recovery.

4.12  Going forward, businesses offering employee share schemes, where participants do not have to pay or borrow to participate in an employee share scheme, will not have to consider or comply with any requirements under the Act in respect of the employee share scheme.

4.13  These reforms build on the:

• • Government’s previous announcement on 13 November 2018 that it would streamline the exclusions under the Act and ASIC class orders to make it easier for businesses to offer employee share schemes;
  • consultation paper released on 3 April 2019 outlining possible approaches;
  • changes announced as part of the 2021-22 Budget; and
  • changes announced as part of the 2022-23 Budget.

Summary of new law

4.14 If an employee share scheme receives relief under Schedule 4 to the main Bill, the standard regulatory requirements for businesses offering shares and financial products to retail clients under the Act will not apply. This will mean:

• • a scheme can be operated without an Australian financial services licence;
  • general financial advice can be provided in relation to the scheme without an Australian financial services licence;

• • the restrictions on advertising and hawking securities and financial products in the Act do not apply to the scheme; and
  • the existing disclosure requirements under the Act do not apply to offers under the scheme.

4.15  In simple terms, an employee share scheme can receive relief under Schedule 4 to the main Bill if:

• • the interests issued, sold or transferred to participants under the scheme fall within certain eligible categories of interests (for example – shares or options);
  • the participants in the scheme are directors, employees, or service providers; or
  • if the scheme requires payment to participate:– certain disclosure documents are provided with the offer;
    • if the scheme has an associated contribution plan, loan or trust, the contribution plan, loan or trust meet certain requirements;
    • the total numbers of products issued under the scheme over the previous three years does not exceed the specified percentage of the body’s issued capital (5 per cent for listed bodies or
      20 per cent for unlisted body corporates, unless otherwise specified by regulations or the body corporate’s constitution); and
    • for an unlisted body corporate, all participants are generally limited to outlay a monetary cap of $30,000 per year (which can be accrued for unexercised options over a 5-year period, up to a maximum of $150,000), plus 70 per cent of dividends and 70 per cent of cash bonuses.

4.16  Generally, for an employee share scheme to receive relief under Schedule 4 to the main Bill the interests offered, issued, sold or transferred under the scheme to participants must be:

• • for listed body corporates, the interest must be able to be traded on a financial market, and be one of the below types of interests;
    • a fully paid share;
    • a beneficial interest in a fully paid share;
    • a stapled security; or
    • a unit in, an incentive right in relation to, or an option to acquire one of the above interests;
  • for unlisted bodies corporate:

• • • a fully paid share; or
    • a unit in, an incentive right in relation to, or an option to acquire a fully paid share;
  • for registered schemes:
    • an interest in the registered scheme that is tradable on afinancial market; or
    • a unit in, an incentive right in relation to, or an option to acquire an interest in, the registered scheme that is tradable on a financial market.

4.17  Employee share schemes which require participants to pay for an interest to participate will need to provide disclosure in relation to offers under the scheme. The disclosure requirements are streamlined versions of the general requirements under the Act.

4.18  The disclosure documents required to be provided are:

• • for a listed body corporate or registered scheme – certain warnings;
  • for an unlisted body corporate:
    • certain warnings;
    • certain financial information about the body corporate;
    • a valuation of the interests; and
    • a statement that the company is solvent.