Employee share ownership plans - corporate regulatory requirements - a guide for employers
This page introduces the basic corporate regulatory requirements involved in the establishment of an employee share ownership plan (ESOP).
It deals only with plans involving the issue or purchase of fully paid shares, and not with other plans such as option or replicator plans. There are also additional considerations which may have to be taken into account if the share plans involve regular contributions.
The Corporations Act
The Corporations Act generally requires that a company wishing to issue shares should only do so if it prepares a disclosure document containing certain information, and provides that disclosure document to the plan participants.
There are certain legislative exemptions from these requirements and the Australian Securities and Investments Commission (ASIC) also has power to grant relief from certain provisions of the Corporations Act including those regarding disclosure and licensing and provisions restricting or prohibiting advertising or share hawking (promoting the acquisition of shares).
ASIC has issued a Policy Statement outlining the basis on which relief will be granted in respect of an ESOP. ASIC also provides relief on conditions under a relevant Class Order.
The Policy Statement and Class Orders primarily relate to stock exchange listed companies. However, relief for unlisted companies may be considered on a case by case basis. Unlisted companies should assume, at least initially, that they will have to comply with the disclosure document requirements.
Many ESOPs are administered through trusts. There are additional Corporations Act requirements for these ESOPs, although relief may be available under the Class Orders. There are also additional Corporations Act requirements concerning the licensing of administrators and the management of funds.
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Types of disclosure documents
Disclosure documents need to be lodged with ASIC. There are four types of disclosure documents:
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A prospectus – the standard full disclosure document;
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A short-form prospectus which refers to documents already lodged with ASIC;
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If approved by ASIC, a profile statement which refers to a prospectus being made available upon request; and
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An offer information statement where the amounts to be raised and previously raised by the issuing group aggregate $5 million or less.
Where shares already on issue are being purchased by the ESOP, a disclosure document may also be required.
Listed public companies may in some circumstances issue a special shorter form prospectus.
Disclosure documents may be costly to prepare so the exemption provisions should be fully explored.
Further information about the different types of disclosure documents can be found in the Corporations Act 2001. This Act can be accessed at www.comlaw.gov.au. The ComLaw site can also be accessed from the ASIC web site at www.asic.gov.au, by clicking the 'laws we administer' link on the right hand link bar and scrolling down to the 'getting copies of laws' heading.
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Disclosure documents exemptions
Disclosure documents are not required in certain circumstances, including:
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Where small scale personal offers or (in some circumstances) sales are made – 20 issues or 20 sales in 12 months. This is limited to an aggregate of $2 million in each case, and in certain cases issues and offers by related corporations may have to be aggregated; or
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Where the offers or sales are large scale, or made to sophisticated investors. Each offer would be for not less than $500,000, or the investor would need to meet certain qualifications as to net assets and income over the prior two years; or
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Where the offers or sales are made to "professional investors" (as defined); or
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Where the offers or sales are made to executive officers (or their associated companies) of the corporate employer; or
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where offers are made through licensed dealers and certain other conditions are met; or
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Where offers are made by exempt public authorities or bodies.
ASIC policy statements
Policy Statement 49 (PS 49) sets out key guidelines for disclosure document relief for issues of shares made to ESOPs and was first issued in March 1993.
The relief is primarily available to stock exchange listed companies.
The policy was recently substantially rewritten to reflect legislative change and was reissued on 1 May 2003.
Disclosure document relief will be provided where the aim of the offer is to involve employees in ownership of the corporate employer rather than for fundraising.
The maximum number of shares that can be issued to an ESOP over a five-year period is 5% although some share issues are excluded in calculating that figure. Note however that the 5% limit applies to new issues and not to acquisitions of existing shares.
Other guidelines of PS49 relate to the content of handbooks provided to employees invited to participate in the ESOP and the need to lodge a copy of that material with ASIC where relief has been granted. PS49 can be viewed through the ASIC website www.asic.gov.au.
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ASIC class orders
The class orders (CO) follow on from PS49 and set out the conditions under which relief from providing full prospectus structured disclosure documents will be granted to companies.
The key CO issued, 03/184 can be viewed through the ASIC web site www.asic.gov.au
Any CO relief that can be obtained is important where disclosure documents are required especially where the exemptions cannot be accessed.
ESOPs and financial services legislation
The financial services legislation incorporated in the Corporations Act also has implications for ESOP and corporate employers. Although ASIC has again provided some disclosure and licensing relief (primarily for listed companies).
The effect of this legislation deals with:
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How shares (and options) are offered;
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How they are managed once participation in the ESOP has occurred;
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Who is qualified to offer and/or independently administer ESOP shares; and
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Provision of financial product advice.
NOTE: There are also a number of statutory exemptions and exemptions in regulations that may be available for companies.
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Other considerations
Stock exchange listing rules
Companies listed on a stock exchange also have to comply with the listing rules of that stock exchange body. For instance a company listed on the Australian Stock Exchange (ASX) must have its ESOP submitted for approval by its shareholders every three years, otherwise issues made to participants may be restricted.
Furthermore, there are also listing rules which require shareholder approval where shares or options are to be issued to persons of influence such as a director.
The Listing Rules may be examined through access to the ASX website www.asx.com.au.
ASX Corporate Governance Council
The ASX Principles of Good Corporate Governance and Best Practice Recommendations were released in March 2003.
While these are guidelines only, they affect ESOP design to the extent that Principle 9 sets out a number of clear directions as to how executive remuneration, including equity based remuneration should be developed and is required to be disclosed in annual reports of listed public companies.
A copy of the guide is available at www.asx.com.au/corporategovernance.
Constitution of corporate employer
Employer’s own by-laws may contain provisions which require the establishment of an ESOP and shares issued under it to be approved by shareholders. These need to be examined.
Employee relations and employment law
As with any benefit provided to an employee, employers must be aware of the employee relations, employment contract, enterprise bargaining agreement (EBA) and award consequences. Many awards for example do not provide for ‘salary sacrifice’ arrangements.
Information about wages and conditions of employment in Australia for work that is covered by federal awards and agreements can be found at http://www.wagenet.gov.au
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Australian and International Accounting Standards - IRFS 2 and AASB 2
On 19 February 2004 the International Accounting Standards Board (IASB) issued International Financial Reporting Standard 2 Share-based payment (IFRS 2) on accounting for share-based payment transactions, including grants of share options to employees.
The objective of IFRS 2 is to specify the financial reporting by an entitity when it undertakes a share-based payment transaction. In particular, the IFRS requires an entitiy to reflect in its profit and loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share based options are granted to employees.
The Australian Accounting Standards Board (AASB) has adopted the IFRS 2 as Pending Accounting Standard AASB 2. AASB 2 is almost identical to IFRS 2, with only small differences to the International Standard reflecting domestic, regulatory or other issues. Many ESOPs such as exempt plans and deferred plans already expense the benefit, however, with the introduction of the AASB 2, other plans such as option plans, partly paid plans and loan plans will have to be valued and the relevant expense recognised. Comprehensive information is available at www.aasb.com.au.
The Standard will apply for reporting periods beginning on or after 1 January 2005, an dis expected to be finalised in May/June 2004.
The expensing of share-based transactions may have a profound impact on the design of your ESOP.
All ESOP offers now need to be cognisant of the potential accounting impact before implementation.
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Other bodies involved in setting corporate governance standards for ESOPs
- Investment & Financial Services Association (IFSA);
- Australian Institute of Company Directors (AICD);
- Australian Shareholders Association (ASA); and
- Australian Employee Ownership Association (AEOA)
In the case of listed public company employers, each of the above organisations has a special interest in the development of employee share schemes in Australia.
IFSA Guidance Note No.12 (May 2000) – Executive Share and Option Scheme Guidelines and IFSA Guidance Note No. 13 (May 2000) – Employee Share Scheme Guidelines which were endorsed by AICD, ASA and AEOA should also be taken into account in the design of any public company ESOP.
These guides and other relevant material are available from their web site at www.ifsa.com.au/guidancenotes.
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ESOP Regulatory Considerations
The following diagram illustrates key regulatory categories to be considered relating to the introduction of an ESOP.
AASB Australian Accounting Standards Board
AEOA Australian Employee Ownership Association
AICD Australian Institute of Company Directors
ASA Australian Shareholders Association
IASB International Accounting Standards Board
IFSA Investment and Financial Services Association
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Where can I go for further information?
Further information about corporate regulations relating to ESOPs can be found at:
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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