Considering your employee share ownership plan offer - a guide for employees
Any decision to participate in an employee share ownership plan (ESOP) must be made by you, the employee, after careful consideration of the offer materials and after obtaining the advice of suitably qualified personnel and advisors.
This page provides basic information about becoming a shareholder and outlines some of the key information that should be included in an employee share offer. It also describes some of the steps you can take in order to fully understand the offer your employer is making to you.
Remember, your employer is unable to advise you as to whether you should or should not accept an offer to participate.
Becoming a shareholder
Ideally, all ESOP participants should have some basic background knowledge about the share market. This knowledge should include:
What is a share?
When you acquire shares in a company, you “share” in the benefits of ownership, which may include dividends, capital appreciation and voting rights.
Companies may be listed public companies, unlisted public companies and proprietary (ie. private) companies.
Shares in listed public companies are traded on the share market. In Australia the share market is the Australian Stock Exchange.
For more information about how the share market works visit www.asx.com.au
How a share market operates
Shares in listed public companies are quoted on a stock exchange. Licensed brokers, on behalf of buyers and sellers, either bid (to buy) or offer (to sell) shares on the “market”. When a bid price and offer price are matched a transaction occurs at the “market” price.
For more information about how the share market works visit www.asx.com.au
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Risks and market factors
Share prices can go down, as well as up. In the worst case, you might lose your entire investment in the shares. The short-term movement, up and down, in share prices is termed volatility. Whether the shares you own in a company are a good investment will depend on many factors, including current and future earnings of the company, the quality of staff and management of the business, the current and future prospects of the industry the business operates in, the local and world economic prospects and overall stock market trends.
Understanding risk and obtaining suitably qualified independent financial advice is important before investing in shares.
Responsibilities of being a share owner
As a shareholder you will generally have a right to vote at any general meeting of shareholders. Your vote generally will be exercised in proportion to your shareholding.
It is your responsibility to ensure that your personal contact details are properly maintained with the company’s share registry.
Learning more about being a share owner
If you wish to learn more about listed shares and the share market, the ASX conducts a range of courses. Visit www.asx.com.au for details. More advanced courses are also available through the Securities Institute of Australia on www.securities.edu.au
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Types of ESOPs
There are four broad categories of ESOPs operating in Australia:
Fully paid plans
Fully paid shares are either bought on market or issued and paid for by loans from the company to the individual employee participant or funded out of a share of profits or salary sacrifice arrangements.
Deferred Plans, Exempt Plans, Loan Plans and Salary Sacrifice Plans are all in this category.
Partly paid plans
Participants in partly paid plans are issued shares at a market or predetermined price (eg: $2) but are only required to pay a small portion of their value (usually 1 cent). The participants remain liable for any unpaid amount (i.e. $1.99) on the shares, even if the market price of the shares falls below the value at the date of issue.
Partly paid plans are not commonly used in Australia.
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Option plans
An option is a contractual right to acquire a share in the future at a set price. Fully paid shares are issued on “exercise” of the right, the payment of any specified exercise price and the fulfilment of any other specified conditions.
Replicator plans
A replicator plan gets its name because the plan tries to “replicate” a real employee share plan, but does so without issuing real shares or options.
A replicator plan usually offers participants, for no or nominal cost, an entitlement to receive a cash payment in the future subject to satisfying predetermined performance and/or vesting conditions.
A replicator plan may be supported by a set of plan rules, an offer letter, a plan booklet and even a “Certificate of Entitlement”. Replicator plans are often used where the company does not want to use “real” shares, for reasons including retaining control, avoiding minority interest problems or lack of a market.
Replicator plans are also known as “phantom” plans, “synthetic” plans or “shadow” plans. There are many complex taxation, Corporations Act and accounting issues to consider for these types of plans which may limit their effectiveness.
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Why might I consider participating in an ESOP?
There are many reasons why you might consider participating in an ESOP. The benefits of participation may depend on the type of offer being made to you however they may include:
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owning a part of the company
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sharing in the success of the company
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an investment
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accessing concessional tax arrangements
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defering tax on your income in a given year
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acquiring shares at a discount to the market value
Remember, every offer is different and the benefits of participating will depend on your personal circumstances which may need to be considered with the help of professional advisors.
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Employee offer activities
As participation in an employee share plan may have taxation and other important consequences for you it is critical that you are fully informed about the offer before you make your decision to participate.
Basic steps you may follow when making your decision includes those outlined below.
Step 1 Receive offer material
An invitation to participate in an employee offer and details about the offer may be provided to you in a letter, a booklet, or electronically via e-mail or access to an employee offer intranet site.
The offer material should summarise the terms and conditions of participation.
Step 2 Read all offer material
It is most important that you read carefully all the offer material provided to you. Even if the language is unfamiliar at first, it is worth persevering so that you are fully informed about the offer that is being made.
Step 3 Attend a presentation or briefing session
If your employer is providing briefing sessions or presentations about the offer it is worth going along to find out the answers to questions you may have. These sessions are a good opportunity to hear the offer explained and to ask questions.
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Step 4 Consult a suitably qualified tax and financial adviser
It is wise to seek independent advice from a suitably qualified professional about your participation in the ESOP. This is particularly important with regard to taxation implications.
Step 5 Determine consequences of participation
The offer material should summarise the terms and conditions of participation in the ESOP.
It is critical that you consider each of the terms and conditions against your own particular situation. This may include:
Tax implications : The offer booklet may provide a general summary of the tax implications of participation, and the circumstances that trigger a tax event.
Tax will generally be payable after you have submitted your income tax return for the year in which the tax event occurred.
You should nevertheless seek professional tax advice about the implications of your participation.
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Vesting restrictions : The offer material should clearly state when the shares "vest" that is, when they will be available to you to sell or otherwise deal with. These are often referred to as vesting restrictions or vesting requirements.
Employment requirements : There may be conditions that are triggered at the time you cease to be an employee of the company (often referred to as cessation of employment). For example, it may be a condition of the plan that the shares are sold at this point, or you may have to repay monies in order to access the shares.
There may be performance criteria or implications if you are dismissed as a result of misconduct.
Share release process : Once your shares have vested there may be a process for you to follow in order to access them. This may involve lodging a form with the administrator of the ESOP.
Company restructure : In some cases, your shares may be sold or withdrawn from the ESOP and a tax event triggered if the company is sold or restructured
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Step 6 Note the closing date of the offer
In order to accept the invitation to participate your application form or formal acceptance must be lodged by the offer closing date.
It is a good idea to take note of what the closing date is so you know how much time you have to make your decision about participating.
Step 7 Make your decision
Once you have completed all the steps outlined above you then have to make a decision as to whether you will or will not accept the invitation to participate.
The offer material should clearly state how you can accept the offer, or whether you need to take action to reject the offer.
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What my employer should tell me
As mentioned above, the offer material you receive should outline the terms and conditions of the offer that is being made, and contain all other relevant information to enable you to decide whether or not to take up the offer.
In brief:
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The material should summarise the general taxation consequences of participating in the plan;
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The material should disclose the full details of how the plan operates, and who is eligible to participate;
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A copy of the Plan Rules should be available on request. These are sometimes included with the offer material;
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You should be advised of the share price at the time the offer is made to you, and again at the time the shares are allocated to you; and
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You should be told how to withdraw any benefit accruing under the plan.
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Summary of employee offer activities
The list below summarises steps which you should go through as a minimum before accepting an offer to participate in an ESOP.
Summary of employee offer activities
Receive offer material
Read all offer material
Attend briefing session or presentation
Consult suitably qualified tax and financial adviser
Determine consequences of participation
- tax impact
- vesting restrictions
- employment requirements
- share release process
- check closing date of offer
Make decision about participation
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Where can I find out further information?
Further information about participating in an ESOP can be found at:
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Important notice
This publication is produced for general information only. It does not represent professional advice given by the Commonwealth or any person acting for the Commonwealth for any particular purpose. Users should make their own further enquiries, (including as to the accuracy, currency, reliability or completeness of any information contained in this publication) and obtain professional advice where appropriate, before making any decision to take action or not take action on any matter which it covers.
To the maximum extent permitted by law, the Commonwealth and all persons acting for the Commonwealth in preparing this publication, disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based upon the information in this publication.
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