Employee Share Schemes (‘ESS’) are a great way to attract, retain and motivate employees. Until recently there have been a lot of restrictions and requirements on ESS implemented by proprietary companies. One such restriction had been that if a company wanted to issue shares or options, it had to be accompanied by a prospectus unless an exemption in the Corporations Act 2001 (Cth) applied. Even though these exemptions were not expressly stated to apply to ESS, it included offers made to senior management and personal offers which could only be offered to a maximum of 20 people and could not exceed a value of $2 million within any 12 month period. The recently commenced Treasury Laws Amendment (Costs of Living Support and Other Measures) Act 2022 (Cth) – Schedule 4 not only expressly allows for these exemptions to be used in relation to ESS, it also provides additional exemptions to the requirement that offers need to be accompanied by a prospectus. While this Act removes certain restrictions found in the Corporations Act 2001 (Cth), it does not affect tax rules relating to ESS.
The Act makes a distinction between two kinds of offers.
- Offers where the issue of shares or the exercise of options involve no monetary consideration.
- Offers where companies require monetary compensation for the ESS. Such offers have additional requirements.
Offers with Monetary Compensation
Disclosure Requirements
Where the offer involves monetary consideration, the company is required to provide employees with an offer document.
An ESS offer document needs to satisfy criteria such as containing the terms of the offer, general information regarding the risks of participating in the ESS and a recommendation that the participant should obtain personal advice in relation to the offer. The document will also need to provide a timeframe during which the offer may be accepted and state that the offer does not take into account the participant’s objectives, financial situation or needs. In addition to these requirements, ESS offers from unlisted companies will also need to satisfy requirements such as a statement which notes that the ESS interest may not have any value or that its value would depend on future events. Unlisted companies will also need to attach supporting information including the company’s financial statements, a valuation of the ESS interest and a statement that the company is solvent.
Monetary Cap on Offers
Unlisted companies will also have to comply with a monetary cap. The current monetary cap for a primary participant for a 12 month period is $30,000 plus 70% of the amount of any distributions received in the current period by the participant.
Offers with No Monetary Compensation
If the offer involves no monetary consideration being provided by the employee, then there are no requirements imposed by the new legislation. i.e., no need for the company to provide an offer document, financial statements or a valuation. This makes implementing an ESS especially appealing if you plan offering shares for no monetary consideration.
These new changes are especially appealing to larger unlisted companies who were previously handicapped by the fact that the exemptions only applied to up to 20 employees and senior management. These changes mean that companies who want to issue shares for no consideration for a large number of employees can do so much more easily.
Conclusion
If you need help preparing an ESS offer document or have questions in relation to Employee Share Schemes, please do not hesitate to contact Michael Bishop of our office.
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