GRG Remuneration Insight 142

by Denis Godfrey, James Bourchier & Peter Godfrey
4 August 2022

Introduction

New employee share scheme (ESS) provisions in the Corporations Act come into effect in relation to offers made on or after 1 October 2022 in reliance on the new provisions.  Concurrently, it is expected that Class Orders (COs) 14/1000 (relates to listed companies) and 14/1001 (relates to unlisted companies) will cease to apply to new offers.

The COs provide various forms of relief from Corporations Act requirements. One of these is relief from s707, which requires a prospectus or other relevant disclosure documentation to be provided by employees who wish to sell (“on-sale”), within 12 months, shares which were newly issued to settle exercised rights or options.

Two issues of concern have emerged being that:

  1. As the new ESS provisions do not contain equivalent on-sale relief, there is potential for:
    1. inadvertent breaches of the law by employees, or
    2. employees being, in effect, compelled to retain shares for 12 months after issue and thereby possibly becoming:
      1. liable for tax before shares may be sold, and
      2. exposed to possible loss of benefit should the share price fall.
    3. This will only apply to offers made from 1 October 2022 under the new ESS provisions.
  2. Because the COs are due to “sunset” on 1 April 2025, the relief provided under the COs will cease to apply 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 is possible to issue Shares to Directors, the CEO and other senior executives in Australia under s708, you should expect problems to arise for any other employee equity plan issue, or issues to any executive or director located outside of Australia.  Possible solutions or methods of management are outlined below.

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.

GRG Remuneration Insight 142: Table – effect of new legislation on Australian employees
GRG Remuneration Insight 142: Table – effect of new legislation on overseas employees

Actions That May be Taken

Alternatives to Manage the Problem

There are several approaches that may be introduced to overcome the on-sale disclosure requirement or disposal restriction problem, including the following:

  1. Use an employee share trust (EST) to accumulate the shares needed to settle rights, options etc. more than 12 months before settlement so that no shares provided on settlement of exercised rights, options etc. have been issued less than 12 months before the exercise.  This approach presents two substantial problems, being:
    1. for companies with rising share prices, of resulting in a lesser tax deduction for the company (via contributions to the EST to fund the acquisition of shares at exercise), and
    2. the challenge of the need to try to predict the number of Shares that will be required to settle rights or options, 12 months before likely exercise.
  2. When rights, options etc. are exercised, contribute the funds to acquire the shares to an EST and have the EST trustee acquire the share on-market.  This approach can be cash flow costly for companies and can result in additional administrative complexity for the trust, as it will be holding unallocated Shares and penal tax will apply to any dividends received etc.
  3. Apply a 12 month disposal restriction to shares to be acquired on exercise of rights, options etc. if they are to be newly issued at exercise.  This approach may not be acceptable to employees who wish to sell shares soon after rights, options etc. are exercised.
  4. Limit plan participation to only “Senior Managers” under s708, who are generally directors, the CEO and direct reports to the CEO (in Australia only; does not apply to foreign persons).
  5. If the plan is an Indeterminate Rights plan, settle in cash.
  6. Apply to ASIC for company/plan-specific relief.

Make a Submission to ASIC

If the problems identified in this GRG Remuneration Insight are of concern to you or your company, then it would be appropriate to lodge a submission to ASIC, setting out your views on these matters issues and asking ASIC to take corrective action.  GRG has lodged a submission, and understands that any other submissions need to be provided to ASIC by 22 August 2022.