Two issues of concern have emerged being that:
- As the new ESS provisions do not contain equivalent on-sale relief, there is potential for:
- inadvertent breaches of the law by employees, or
- employees being, in effect, compelled to retain shares for 12 months after issue and thereby possibly becoming:
- liable for tax before shares may be sold, and
- exposed to possible loss of benefit should the share price fall.
- This concern applies to offers made from 1 October 2022 under the new ESS provisions.
- Because the COs are due to “sunset” on 1 April 2025, the relief provided under the COs will cease to apply to new Shares received at exercise after 1 April 2025 unless the COs are renewed, or similar relief is provided otherwise. This will apply to all offers made in reliance on the COs prior to 1 October 2022, noting that many Rights have a life of up to 15 years. It is important to note that this 2025 sunset date does not allow for new grants to rely on the CO up to this date, only that the relief provided in the CO will apply to grants made before 1 October 2022, up to this date. This mainly relates to the 12-month-on-sale requirements relief.
It is understood that ASIC is seeking consultation on these issues and may take action to address these problems. However, Boards need to be aware of these problems and prepared to address them just in case ASIC does not adequately deal with them. The lack of on-sale relief in the new ESS provisions is an early indication that these matters may not be adequately addressed.
While it has been and continues to be possible to issue shares to directors, the CEO, other senior executives (s708) and overseas employees (outside the Corporations Act’s scope) without disclosure documentation in Australia, such issues are not exempted from the 12 months on-sale restriction unless a cleansing notice is lodged with the stock exchange within 5 days of the issue. For many companies, the ability to issue a cleansing notice regularly following each exercise date cannot be relied upon and the issuing of such notices is therefore not a reliable solution.
Current Disclosure Requirements Summaries
Following are two tables dealing with disclosure and other Corporation Act compliance requirements that relate to ESSs for Australian and overseas employees of Australian companies.
The grey shaded areas of the tables indicate where the potential problems may occur.