Employee incentive schemes for listed entities: ASIC expands its disclosure relief

​Background

On 31 October 2014, ASIC announced the release of new Class Order 14/1000, covering employee incentive schemes of listed entities, and updated the related Regulatory Guide 49. Among the changes, the new class order expands upon the types of securities that are covered by the exemptions for complying employee incentive schemes, as well as including contractors and casual employees as recognised eligible participants.

In a good outcome for listed entities, the relief given under the new class order reflects current market practice, adopts a number of the submissions made through the public consultation process and will enable issuers to avoid the costly and timely exercise of obtaining case-by-case relief in many situations where they would previously have been required to do so.

ASIC’s previous Class Order 03/184 provided exemptions for both listed and unlisted entities. In replacing the class order with two new class orders, ASIC has recognised that there is a clear separation in the users of the employee incentive scheme relief.

For listed entities, Class Order 14/1000 provides for only minor broadening of the important licensing, advertising, hawking, incidental management investment scheme and on-sale relief ASIC is prepared to grant in respect of the requirements of the Corporations Act 2001 (Cth) (Corporations Act). However, there are a number of other changes to the class order relief under Class Order 14/1000, which we regard as positive, in the following areas:

Eligible participants

In addition to directors and full-time and part-time employees being eligible to participate in offers under employee incentive schemes that fall within the class order relief, certain contractors and casual employees may also be eligible, provided they meet the following conditions:

• for contractors, their service to the body must represent 40% of a full-time equivalent position. Notably, ASIC has recognised that their engagement may be direct or through a closely related company; and
• for casual employees, their service to the body must represent 40% of a full-time equivalent position.

In its consultation paper, ASIC initially sought to impose further and more onerous conditions (such as requiring an 80% equivalent test for contractors and a 12 month prior work history for casual employees). However, after considering the submissions in response to its consultation paper, these conditions were not included by ASIC in Class Order 14/1000.

It is also worth noting that non-executive directors have been included within the categories of eligible participants, although ASIC does warn against using performance based, equity incentives for non-executive directors in order to maintain good corporate governance standards.

Financial products offered under a scheme

The types of financial products that may be offered under a complying employee incentive scheme have also been significantly broadened, largely to reflect the types of products commonly offered in the market at present. In addition to shares and options over shares, the class order now recognises the following eligible financial products:

• depository interests in a class that is able to be traded on ASX or on an ASIC-approved foreign market;
• beneficial interests in underlying eligible products in a class that is able to be traded on ASX or on an ASIC-approved foreign market;
• interests in registered managed investment schemes in a class that is able to be traded on ASX; and
• stapled securities in a class that is able to be traded on ASX (but, notably, not those traded on an approved foreign market).

In addition, ASIC has included ‘incentive rights’ in the category of eligible financial products. in light of the responses it received through the consultation process, ASIC chose not to use the term ‘performance rights’ and also elected not to impose a range of conditions on incentive rights, such as automatic vesting, vesting for no monetary consideration or a requirement that performance conditions apply to the right. ASIC will be comfortable that an incentive right falls within the class order if the value to be received by the participant is directly or indirectly referable to an underlying financial product – in this situation, ASIC considers that the incentive right constitutes a ‘derivative’ for the purposes of Chapter 7 of the Corporations Act.

Permitted employee incentive scheme structures

In terms of the structures that can be used for eligible employee incentive schemes, ASIC has recognised the benefits of trust arrangements in employee incentive schemes and, in response to broad support from those who made submissions, ASIC will permit the use of both contribution plans and loans in an employee incentive scheme.

An important recognition by ASIC in relation to trusts is the concept that eligible financial products can be held by the trustee in two ways – on an allocated basis (where each financial products held by the trustee is recorded against a particular participant) or on an unallocated basis (where the financial product are held in a pool for the benefit of participants generally).  It is important to note that voting restrictions apply to the trustee and there is a 5% holding limit (which is consistent with the overall 5% issue limit for employee incentive schemes in relation to listed entities).

In more good news, ASIC has simplified its definition of a ‘contribution plan’ to accommodate various tax and operational requirements of employers (thereby allowing ‘salary sacrifice’ arrangements to be utilised).

The important changes in relation to the use of loans are the imposition of the following requirements:

• loans must be on terms that are no recourse or limited recourse (ie recourse to the relevant financial products issued under the scheme); and
• no fees and no interest is to be payable on the loans.

General conditions

As to the general conditions that apply to the relief, we consider it important to highlight the following:

• the required period of quotation of the relevant financial products has been reduced from 12 months to three months;
• the method of calculating the 5% limit on financial products offered has been simplified;
• offer documents must still be presented in a ‘clear, concise and effective’ manner, however, a summary of the key risks is no longer needed.  Instead, offer documents must include general information about the risks of acquiring and holding the relevant financial product.  The ‘general advice warning’ required by the former class order has been retained; and
• the relevant scheme documents no longer need to be provided to ASIC.  However, the revised ASIC Form CF08 must be lodged no later than one month after an offer is first made under an employee incentive scheme relying on Class Order 14/1000.  This is another win for listed entities from a compliance perspective.