Employee share schemes (or an Employee Share Ownership Plan (ESOP)) have become popular. What are the regulatory issues to consider?

Under Division 13A of the Income Tax Assessment Act 1936 (Cth) a company can establish an ESOP to invite eligible employees to purchase company shares through a tax effective salary sacrifice contribution plan (up to a maximum of $1000 pa).

The ESOP must be operated on a non-discriminatory basis within the meaning of sections 139CE and section 139GF of the Income Tax Assessment Act.

Shares acquired under the ESOP will be subject to a holding lock. Under the holding lock participants will not be permitted to dispose of shares acquired under the ESOP until the earliest of:   

•    the third anniversary of the acquisition date, or such other time as may be determined by the Board subject to the satisfaction of the exemption conditions set out in section 139CE; or   
•    the date the participant ceases employment within the meaning of subsection 139CE(5).

Disclosure and licensing obligations
ASIC Class Order 03/184 and its Policy Statement 49, discuss relief for ESOP’s from the Corporations Act share offer disclosure requirements and financial services licensing and anti-hawking obligations.

The underlying concern of ASIC in this area is balancing the promotion of employee-employer long term benefit with ensuring both adequate protection of employees and that the purpose of the offer of shares is participation not fundraising [PS 49.3 – PS49.5].

PS 49 states that there are three key conditions that must be met for this conditional relief to be granted (in addition to other conditions regulating contribution plans and the use of a trust structure):
• The aim of an ESOP offer is not to be one of fundraising [PS 49.32] – this policy is given effect by a limit of 5% on the number of shares that can be issued under an employee share scheme;
• There must be mutual interdependence [PS 49.37] – the nature of the employee-employer relationship, rather than the coverage of the ESOP scheme, will be considered on a case-by-case basis; and
• There must be adequate disclosure [PS 49.41] –disclosure relief will apply only where the shares offered to employees are in a class listed on the ASX or an approved foreign exchange. In addition, at the time of the offer the issuing corporation generally must have been listed for at least 12 months [PS 49.42]. In some exceptional circumstances ASIC may grant case-by-case relief to reduce the 12-month requirement [PS 49.43].

Taxation concessions
To meet the definition of a ‘qualifying plan’, an ESOP must involve:
• The acquisition of options or ordinary shares in the employer company;
•     The employee must not (directly or indirectly) hold or control more than 5% of the shares in the employer company; and
• The scheme must be offered to at least 75% of permanent employees.

If a plan qualifies, then the employee may elect to obtain either a $1,000 assessable income tax reduction or to defer tax liability on the shares/options for up to 10 years.

UPDATE 29 May 2007: new article

UPDATE 21 June 2007: Corporations Act changes