ASIC Consults on Employee Incentive Scheme Policy

by K&L Gates LLP
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ASIC has Released a Consultation Paper for Proposed Changes to its Policy on Employee Incentive Schemes

The Australian Securities and Investments Commission (ASIC) has released a consultation paper, seeking feedback on proposed reforms to its class order relief and guidance for employee incentive schemes. An updated version of its Regulatory Guide on employee incentive schemes has been circulated with the consultation paper.

In a welcome development for employers, ASIC proposes various changes designed to facilitate the use of employee incentive schemes, in line with market practice. These changes include:

  • broadening the types of financial products that may be offered under employee incentive schemes, including stapled securities and performance rights
  • enabling contractors and casual employees to participate in incentive schemes (provided they meet certain conditions), as well as prospective employees
  • providing more flexibility for employers to structure their incentive schemes, including the use of trust structures, contribution plans and loan arrangements
  • reducing administrative burden by not requiring lodgment of documents with ASIC
  • expanding the circumstances in which unlisted bodies can offer employee incentive schemes.

In addition, ASIC proposes to:

  • reduce the minimum quotation condition applicable to the offer of listed shares from 12 months to three months
  • clarify that associated bodies corporate of an issuer (rather than the narrower class of 'related bodies corporate') can offer securities under an employee incentive scheme.

More detail about some of the proposed changes is set out below.

What Financial Products May Be Offered under an Employee Incentive Scheme?

As well as fully paid shares and options over fully paid shares, ASIC proposes to permit the offer of the following products under employee incentive schemes:

  • CHESS Depositary Interests (Australian CDIs) quoted on the Australian Securities Exchange (ASX) as well as CREST Depositary Interests (UK CDIs) and American Depositary Receipts (ADRs) quoted on approved foreign markets
  • fully paid stapled securities quoted on ASX
  • options over, or units in, the above financial products
  • certain performance rights relating to these financial products, including rights to underlying eligible financial products or equivalent cash amounts.

This is a welcome proposal given the general popularity of products such as performance rights which currently require individual relief to be sought from ASIC, which is a timely and costly exercise.

Who Can Participate in Employee Incentive Schemes?

As well as full time and part time employees (including executive directors), ASIC proposes permitting other categories of staff to participate in incentive schemes, on certain conditions, including the following.

Contractors

  • The contractor must have worked for the employer for 12 months before the offer is made, on the pro-rata equivalent of 80 percent or more of a full time position.
  • The employer must intend to continue employing the contractor for a further 12 months.

Casual employees

  • The employee must have worked for the employer for 12 months before the offer is made. During that time, worked the pro-rata equivalent of 40% or more of a full time position.

Non-executive directors

  • Non-executive directors may participate in incentive schemes offered only to non-executive directors, but not in general employee incentive schemes.
  • An incentive scheme for non-executive directors is limited to the offer of shares, depository interests or stapled securities (and may not extend to performance rights or options).
  • Non-executive directors must contribute their own funds to acquire the products, which can occur through a contribution plan, but must not involve a loan or other financial assistance.

Structuring Employee Incentive Schemes

In line with market practice, ASIC proposes to permit employee incentive schemes to use a trust structure, in which the trustee may hold specific products on trust for specific employees, or it may hold products in a pool, on trust for the scheme participants generally.

Feedback on the consultation paper is due by 31 January 2014. If you are considering making submissions on the consultation paper, please let us know and we will be happy to assist.

As an alternative to the proposed changes summarised above, ASIC has noted that two other alternatives are available: to maintain its existing approach, subject to some minor updates; or to make changes without imposing investor protection conditions on employers. ASIC does not recommend these alternatives, but is interested in receiving any feedback on them, as well as its recommended changes.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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