ASIC’s Consultation on Employee Share Schemes – The Good, the Bad and the Ugly

by Employee Share Ownership on November 29, 2013


under reviewIn fairness to ASIC (Australian Securities and Investments Commission) the paper is more good than bad.  ASIC undertook a very extensive consultation process prior to the release of this paper.  It has also largely listened to that feedback and made changes that are intended to simplify the Class Order.


  • There are some additions and amendments that may unintentionally make the practical applications of the Class Order harder;
  • There are still some very clear policy views around certain situations, which will lead to a restrictive view of the exemptions; and
  • For unlisted companies, the changes were specifically aimed at broadening the exemption.  However, one new element of this exemption may actually make it harder for unlisted companies.

The Good

So the good news is:

  1. The continuous quotation period for listed companies has been shortened to 3 months and the allowable suspension from trading in that 3 month period has been increased to 5 trading days.
  2. Performance rights, Indeterminate rights, CDIs (Australia and UK) and ADRs (US) are all now clearly included.
  3. The Class Order has been extended to casual employees and contractors where they meet certain conditions.  E.g 12 months service prior to the date of the offer and the casual role must be equivalent to 40% of a full time role, the contractor must be equivalent to 80% of a full time role.
  4. Lodgment of documents has been simplified.  Completion of a standard form is needed only at the time of the first offer (provided the offer does not significantly change) and there is no need to lodge sample materials.
  5. There is no need to give the offer price at the date of the offer.  This used to cause some administrative issues.  i.e. trying to calculate the formula on the day the offer was being made.  It is now sufficient to state the formula or actual price and how an employees can track this.
  6. The Trust exemption now includes the concept of an unallocated pool.
  7. There is clarification about the 5% in 5 year cap and it is extended to include the new security types.
  8. Under contribution plans the opt out notice period requirement has been changed to 1 month rather than at anytime.
  9. Contributions for employees can be held in different places rather than just on trust by the employer.

The Bad

There are few things that will cause some practical issues for companies, especially:

  1. The requirement for 25% of shares (post exercise or vesting) to be held for 12 months.  For most employee plans the restriction usually lifts at cessation of employment and the employee is taxed at this time.  So to impose this condition absolutely may be difficult to administer.  In addition the requirement for performance rights and options to have shares held for 12 months post vesting may be out of line with market practice.
  2. There is no voting allowed on unallocated shares and this will require most companies to review or amend their Deeds if this goes through unchanged.  Most Trust Deeds allow for voting, and in practice, most Trustees do vote on unallocated shares.

There are also a few policy views that cause some concern:

  1. ASIC’s view is that employee incentive plans can never be offered for no consideration because of the employer/employee relationship.  This is very restrictive view especially for $1,000 plan which are very low or no risk to employees.
  2. Rights are seen as derivatives where the rights can be met by shares that are issued or purchased on market.  Rights can not be compared to options where there is no exercise process.  Under these rules most rights plans would be considered to be a derivative or a unit in a share according to ASIC.  This does not align with the current ATO view of rights.

The Ugly

Perhaps the most unintended and significant impact of the current proposal is that it is hard to see how unlisted companies can rely on the Class Order going forward unless it is amended.

There are a couple of killer strokes in the drafting:

  1. The requirement that there is only one class of share on issue (ordinary share) within the company.  This is a new requirement and applies to both exemptions.  It is likely to mean that many companies will not rely on the Class Order and the previous exemption around options may no longer be open to them.
  2. There is a limit of 5% of issued capital in relation to the offers that is still very prohibitive for some companies.
  3. The inclusion of $1,000 plan is helpful but the fact that no trust can be used will make it practically hard to implement.  Commonly a trust is used for larger employee groups to minimize the administration associated with multiple shareholders.  The valuation methodology for $1,000 may also be cost prohibitive.

The Consultation Paper is a 100 page document and the above is only really a snapshot.

Our membership site has a more detailed document that sets out:

–          ASIC’s policy views;

–          the structure of the proposed Class Order;

–          what has changed

–          what has been clarified

–          what has been removed from the existing Class Order requirements

Importantly though these amendments are still very much open for comment until 31 January 2014.

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