ASIC RG 49 — ASIC Regulatory Guide – RG 49 Employee incentive schemes

Page 1 REGULATORY GUIDE 49 Employee incentive schemes November 2015 About this guide This guide sets out our guidance on when we will give relief from the disclosure, licensing, advertising, hawking, managed investment scheme, and on-sale provisions of the Corporations Act 2001 (Corporations Act) for an employee incentive scheme. It explains:  who can make offers;  who can receive offers;  what financial products can be offered;  the specific structures that can be used under our relief; and  the general conditions of our relief. Sections B to F of this guide set out our policy and relief for listed bodies, while Section G does the same for unlisted bodies. Note: This guide does not reflect amendments to Div 1A of Pt 7.12 of the Corporations Act introduced by the Treasury Laws Amendment (Cost of Living Support and Other Measures) Act 2022, which received the Royal Assent on 31 March 2022. This guide remains relevant to the continuing obligations for employee incentive schemes (legacy schemes) established under Superseded Class Order [SCO 14/1000] Employee incentive schemes: Listed bodies or Superseded Class Order [SCO 14/1001] Employee incentive schemes: Unlisted bodies. This guide will be reviewed and updated in due course. For more information, please read Corporate Finance Update Issue 22. Page 2 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 2 About ASIC regulatory documents In administering legislation ASIC issues the following types of regulatory documents. Consultation papers: seek feedback from stakeholders on matters ASIC is considering, such as proposed relief or proposed regulatory guidance. Regulatory guides: give guidance to regulated entities by:  explaining when and how ASIC will exercise specific powers under legislation (primarily the Corporations Act)  explaining how ASIC interprets the law  describing the principles underlying ASIC’s approach  giving practical guidance (e.g. describing the steps of a process such as applying for a licence or giving practical examples of how regulated entities may decide to meet their obligations). Information sheets: provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. Reports: describe ASIC compliance or relief activity or the results of a research project. Document history This guide was issued in November 2015 and is based on legislation and regulations as at the date of issue. In August 2026, the note on the front page was inserted. Previous versions:  Superseded Regulatory Guide 49, reissued on 1 May 2003, amended on 4 February 2004 and reissued October 2014 Disclaimer This guide does not constitute legal advice. We encourage you to seek your own professional advice to find out how the Corporations Act and other applicable laws apply to you, as it is your responsibility to determine your obligations. Examples in this guide are purely for illustration; they are not exhaustive and are not intended to impose or imply particular rules or requirements. Page 3 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 3 Contents A Overview ........................................................................................... 4 Our approach to facilitating employee incentive schemes ................ 4 How the Corporations Act applies to employee incentive schemes .. 5 Our relief for employee incentive schemes ....................................... 7 B Listed bodies: Who can make offers? ......................................... 11 Listed bodies and their associated bodies corporate ...................... 11 C Listed bodies: Who can participate in offers?............................ 14 Who can participate in an employee incentive scheme? ................ 14 D Listed bodies: What financial products can be offered? .......... 18 Main criteria for eligible products of listed bodies ............................ 18 Other financial products ................................................................... 23 Commissions and cash bonuses ..................................................... 23 E Listed bodies: What structures can be used? ............................ 24 Our approach to the structure of offers ............................................ 24 Trusts ............................................................................................... 24 Contribution plans ............................................................................ 26 Loan arrangements .......................................................................... 28 F Listed bodies: What general conditions apply? ......................... 29 Quotation condition .......................................................................... 29 Issue limit of 5% ............................................................................... 30 Nominal monetary consideration ..................................................... 32 Disclosure provided to employees and ASIC .................................. 32 Excluding bodies from relief............................................................. 34 G Unlisted bodies: What relief is available? ................................... 35 Our approach to offers by unlisted bodies ....................................... 35 Who can make offers? ..................................................................... 36 Who can participate in offers (eligible participants)? ....................... 36 What financial products can be offered (eligible products)?............ 37 What structures can be used? ......................................................... 38 What general conditions apply? ...................................................... 40 H Listed and unlisted bodies: Incidental relief and transitional arrangements ................................................................................. 45 Our approach to licensing and other relief....................................... 45 Licensing relief ................................................................................. 45 Operating a managed investment scheme ...................................... 47 Advertising relief .............................................................................. 48 Hawking relief .................................................................................. 48 On-sale relief ................................................................................... 48 Transitional arrangements ............................................................... 49 Personal offers exemption ............................................................... 49 Key terms ............................................................................................... 50 Related information ............................................................................... 58 Page 4 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 4 A Overview Key points Employee incentive schemes involve the offer of financial products by an employer to its employees. Such offers will trigger a range of obligations under the Corporations Act 2001 (Corporations Act) in relation to disclosure, financial services licensing, advertising, hawking, incidental operation of a managed investment scheme and the on-sale of financial products. We are prepared to give conditional relief from these obligations for employee incentive schemes where: • the offer is designed to support interdependence between the employer and its employees for their long-term mutual benefit by aligning their respective interests; • there is adequate protection for participants in the scheme; and • the objective of the offer is not fundraising. We may also grant individual relief if our policy objectives for employee incentive schemes are met. Our approach to facilitating employee incentive schemes RG 49.1 Traditionally, employee incentive schemes have provided employees with an ownership interest in their employer, and participation in such a scheme may be an important component of the employer–employee relationship. Research generally supports the principle that ongoing ownership interests can lead to greater employee engagement and improved business outcomes. Note: See House of Representatives Standing Committee on Employment, Education and Workplace Relations, Shared endeavours: Inquiry into employee share ownership in Australian enterprises, report, Commonwealth of Australia, September 2000; and G Nuttall, Sharing success: The Nuttall review of employee ownership, independent review for UK Department of Business, Innovation and Skill, July 2012. RG 49.2 Employee incentive schemes may also involve financial products that aim to give employees a financial benefit based on their employer’s performance but without giving them an ownership interest. Depending on their structure, these schemes may also be designed to align the interests of employees with the interests of their employer for their long-term mutual benefit. RG 49.3 If our policy objectives are met, we consider it appropriate to reduce the compliance burden for bodies offering eligible products under employee incentive schemes by providing conditional relief from a number of requirements in the Corporations Act. Various governments have indicated support for employee incentive schemes. Note: For example, see para 5.21 of the Explanatory Memorandum to the Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007. Page 5 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 5 RG 49.4 The main policy objectives that must be satisfied to qualify for our relief are: (a) that the employee incentive scheme is designed to support interdependence between the employer and its employees for their long-term mutual benefit by seeking to align their respective interests—for example, by giving employees an ownership interest in their employer or a cash benefit derived from an increase in the value of the employer’s shares; (b) that there are adequate protections for participants in the scheme, including appropriate disclosure and pricing information for the products offered; and (c) that the objective of the offer is not fundraising. RG 49.5 We have given conditional relief—in Class Order [CO 14/1000] Employee incentive schemes: Listed bodies and Class Order [CO 14/1001] Employee incentive schemes: Unlisted bodies—for employee incentive schemes where the policy objectives in RG 49.4 are satisfied. RG 49.6 The object of our relief is to facilitate offers of financial products under employee incentive schemes in circumstances where the terms of the scheme are designed to support interdependence between the employer and its employees for their long-term mutual benefit. We accept that employers may choose different terms and conditions to give effect to this objective. Examples include imposing different qualifying periods, or restricting the disposal of eligible products until specified conditions have been met. While some employee incentive schemes utilise short-term incentives involving the offer of financial products, we consider these are capable of fostering long- term mutual benefit—for example, where these are offered for no more than nominal monetary consideration. RG 49.7 [CO 14/1000] and [CO 14/1001] cover a range of financial products that can be offered to eligible participants. We will also consider individual relief for other employee incentive schemes that do not meet the conditions of our class orders, provided that they meet our policy objectives set out in RG 49.4. The relief application will need to explain why the conditions set out in the class order are not appropriate, and why any different conditions should apply in the particular circumstances. How the Corporations Act applies to employee incentive schemes Disclosure RG 49.8 The offer of securities and other financial products to investors, including to employees, is regulated under Ch 6D of the Corporations Act (for securities) and under Ch 7 (for other financial products). The Corporations Act requires that, unless an exemption applies, offers must be made under a disclosure Page 6 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 6 document. The purpose of these provisions is to ensure that investors have adequate information to make an informed investment decision. RG 49.9 There are limited disclosure exemptions that may apply for offers to employees of securities and certain other financial products. The disclosure exemptions available for offers to employees include the senior manager exemption (s708(12) and 1012D(9B)) and the small-scale offers exemption (s708(1) and 1012E). Note: In this guide, references to chapters (Chs), parts (Pts) and sections (s) are to the Corporations Act, unless otherwise specified. RG 49.10 We consider that the ‘no consideration’ exemptions (s708(15), 708(16), 1012D(5) and 1012D(6)) generally do not apply if the offer has any connection with the offeree’s employment situation, because the offeree is providing services to the employer and this non-monetary consideration is referable to the offer. We also consider that the exclusion of a contract for the future provision of services from the definition of a ‘derivative’ in s761D (see s761D(3)(b)) is not intended to apply to employee incentive schemes. Our view is that these exemptions are not generally available to employee incentive schemes. RG 49.11 Even if an offer can be made without disclosure under one of these exemptions, the employee incentive scheme may involve conduct that requires compliance with the licensing, advertising, hawking, managed investment scheme and/or on-sale provisions. Licensing RG 49.12 The Corporations Act imposes licensing requirements on the provision of financial services. The licensing requirements may apply to an employee incentive scheme, including where the scheme involves a trust. Other provisions that may apply to employee incentive schemes RG 49.13 The following provisions may also apply to an employee incentive scheme: (a) the prohibitions in s734, 1018A and 1018B on advertising an offer or intended offer; (b) the prohibitions in s736, 992A and 992AA (often referred to as the ‘hawking provisions’) on the issue or sale of financial products arising out of unsolicited contact with investors; (c) the provisions in Pt 5C requiring the registration of a managed investment scheme; and (d) the restrictions in s707 and 1012C on the on-sale of financial products issued without disclosure within 12 months of their issue. Page 7 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 7 Exemptions for eligible employee share schemes RG 49.14 The Corporations Act provides some limited exemptions from the licensing and hawking provisions for ‘eligible employee share schemes’. These exemptions only apply to offers made, with a disclosure document, to certain types of participants (i.e. employees and directors that meet the requirements in the s9 definition of ‘employee share scheme’). Our relief for employee incentive schemes RG 49.15 If our policy objectives are met, we are prepared to give more extensive relief for employee incentive schemes than is provided for under the concept of ‘eligible employee share scheme’ in the Corporations Act. In deciding what relief to grant for employee incentive schemes, we take into account the commercial benefit and the net regulatory detriment that would be expected to flow from granting such relief. RG 49.16 We consider that some of the requirements in the Corporations Act, such as the disclosure and licensing provisions, are disproportionately burdensome if an employer is making the offer to promote its relationship with employees. It is likely that the need to comply with these provisions would deter many employers from providing an employee incentive scheme that may benefit employees. We also consider that an employment relationship may reduce some of the risks that the disclosure and licensing provisions are intended to address. RG 49.17 [CO 14/1000] and [CO 14/1001] reduce the compliance burden for listed and unlisted bodies (respectively) offering eligible products to eligible participants under employee incentive schemes by providing conditional relief from the following provisions of the Corporations Act (as relevant): (a) the requirement to give a disclosure document; (b) the requirement to hold an Australian financial services (AFS) licence for the incidental provision of financial services in connection with the scheme; (c) the advertising and hawking provisions; (d) the requirement to register a managed investment scheme for a contribution plan (listed bodies only); and (e) the on-sale provisions in s707 and 1012C. Note: See Table 1 below. RG 49.18 However, our policy is that we will not extend to providing relief from the licensing, advertising, hawking, managed investment scheme or on-sale provisions where employers are relying on the statutory exemptions from having to provide a disclosure document. Page 8 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 8 Transitional arrangements RG 49.19 [CO 14/1000] and [CO 14/1001] also provide transitional arrangements, under which relief will be ‘grandfathered’ for employee incentive schemes that are in operation in reliance on Superseded Class Order [SCO 03/184] Employee share schemes or similar individual relief. New schemes that come into existence after the commencement of [CO 14/1000] or [CO 14/1001] can only have the benefit of relief in reliance on either of these class orders. Note: See Section H. Table 1: Overview of our relief in [CO 14/1000] and [CO 14/1001] for employee incentive schemes Topic Description Section reference Who can make offers? [CO 14/1000] enables offers to be made by bodies listed on ASX or an approved foreign market and their associated bodies corporate. [CO 14/1001] enables offers to be made by unlisted bodies and their wholly owned subsidiaries. Section B (listed bodies) and Section G (unlisted bodies) Who can participate in offers? (eligible participants) [CO 14/1000] and [CO 14/1001] enable listed and unlisted bodies to make offers to:  full-time and part-time employees;  directors (including non-executive directors);  certain contractors and casual employees; and  prospective participants. Section C (listed bodies) and Section G (unlisted bodies) What financial products can be offered? (eligible products) [CO 14/1000] permits listed bodies to offer:  fully paid shares or stocks;  certain depository interests;  fully paid units in registered managed investment schemes;  fully paid stapled securities; and  options over, units in and incentive rights in relation to any of the above products offered for no more than nominal monetary consideration, unless the options, units or incentive rights are able to be traded on an eligible financial market. [CO 14/1001] permits unlisted bodies to offer for no more than nominal monetary consideration:  fully paid voting ordinary shares;  units in and options over these ordinary shares; and  incentive rights to receive ordinary shares or a cash amount, or some combination of both. Section D (listed bodies) and Section G (unlisted bodies) What structures can be used? [CO 14/1000] provides relief for listed bodies to make offers using the following structures:  trusts;  contribution plans; and  certain types of loan arrangements. [CO 14/1001] provides relief for unlisted bodies to make offers using trusts (but not contribution plans or loans). Section E (listed bodies) and Section G (unlisted bodies) Page 9 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 9 What general conditions apply? For listed bodies relying on [CO 14/1000]:  the product must have been quoted for at least three months with suspension of no more than five trading days in 12 months (or the shorter period during which the product has been quoted);  the listed body or its associated bodies corporate making the offer must, at the time of making the offer, have reasonable grounds to believe that the number of underlying eligible products that have been or may be issued under the offer, when aggregated with offers made under ASIC relief in the previous three years, will not exceed 5% of the issued capital of the listed body;  offer documents must be presented in a clear, concise and effective manner with an advice warning and general product risk warning;  offers must include the documents comprising any trust or contribution plan or summary information about their terms, and the terms of any loan arrangements;  a notice of reliance on [CO 14/1000] is given to ASIC no later than one month after first relying on the class order; and  ASIC has the power to request employee incentive scheme documents and to exclude a body from relying on [CO 14/1000]. For unlisted bodies relying on [CO 14/1001]:  offers can only relate to fully paid voting ordinary shares or units in, options over and incentive rights relating to fully paid voting ordinary shares (where no other classes of ordinary shares are offered under [CO 14/1001]);  all offers of the above financial products can only be made for no more than nominal monetary consideration;  offers must, in aggregate, not exceed $5,000 in value per participant per year, based on a directors’ valuation resolution that is dated no earlier than 12 months before the offer, with the methodology for the valuation being disclosed in the offer document;  the unlisted body or its wholly owned subsidiaries making the offer must, at the time of making the offer, have reasonable grounds to believe that the number of fully paid voting ordinary shares that have been or may be issued under the offer, when aggregated with offers made under ASIC relief in the previous three years, will not exceed 20% of the issued capital of the unlisted body;  if, at the time of the offer, the body has a statutory obligation to prepare, or has prepared, an audited financial statement, the offer document must include that audited financial statement; for all other unlisted bodies, the offer document must include a special purpose financial statement for a 12-month period;  at the time of the offer, the offer document must include a directors’ solvency resolution that is made no later than one month before the offer;  if requested by an eligible participant, for any financial year end after the offer, the offer document must include current 12- month financial statements within four months after that financial year end; Section F (listed bodies) and Section G (unlisted bodies) Page 10 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 10 Topic Description Section reference What general conditions apply? (cont.)  offer documents must be presented in a clear, concise and effective manner, with a general product risk warning; and must contain a prominent specific warning on the front page;  payment of more than nominal monetary consideration on exercise, or vesting, of the underlying ordinary shares is only permitted where the following circumstances are included as terms of the offer: − the underlying ordinary shares have been quoted for three months and have not been suspended for more than five trading days (in the shorter of 12 months or since quotation); or − a valuation document is provided to the participant no later than 14 days before exercise or vesting. A valuation document is a current disclosure document (i.e. offer information statement or prospectus), a copy of an executed agreement for the purchase of underlying ordinary shares on arm’s length terms where the acquirer is not an associate of the issuer, or an independent expert’s report;  a notice of reliance on [CO 14/1001] is given to ASIC no later than one month after first relying on the class order; and  ASIC has the power to request employee incentive scheme documents, and to exclude a body from relying on [CO 14/1001]. Section F (listed bodies) and Section G (unlisted bodies) What other relief is available? [CO 14/1000] and [CO 14/1001] provide relief to listed and unlisted bodies in relation to:  licensing (general advice, dealing, custodial and depository services);  advertising and hawking;  the registration of managed investment schemes (i.e. as a result of the pooling or use of contributions in a common enterprise under a contribution plan used in an employee incentive scheme in relation to listed bodies only); and  the on-sale provisions. Transitional arrangements are also provided for bodies who were relying on [SCO 03/184] or Class Order [CO 04/671] Disclosure for on-sale of securities and other financial products, or similar individual relief, before the commencement of [CO 14/1000] and [CO 14/1001]. In addition, we have provided separate relief in Class Order [CO 14/978] Employee incentive schemes: Personal offers to enable employers to continue to make personal offers regardless of their reliance on [CO 14/1000] or [CO 14/1001]. Section H (listed and unlisted bodies) Page 11 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 11 B Listed bodies: Who can make offers? Key points Generally, the listed body is the primary person involved in making offers under an employee incentive scheme. Our conditional relief in [CO 14/1000] provides relief to the listed body to offer financial products under an employee incentive scheme where the listed body operates in a jurisdiction that we consider is well regulated. Because listed bodies operate using a range of corporate structures, our relief also applies to additional related bodies where there is a sufficient relationship between that body and the listed body. The relief in [CO 14/1000] applies to offers under employee incentive schemes made by: • bodies listed on ASX or an approved foreign market (eligible financial market); and • associated bodies corporate of these listed bodies. Listed bodies and their associated bodies corporate Bodies listed on ASX or an approved foreign market RG 49.20 Our broadest general disclosure relief for employee incentive schemes is focused on bodies that are listed on an eligible financial market (i.e. ASX or an approved foreign market). This ensures that eligible participants have the most accurate and current information because the listed body will be subject to the continuous disclosure regime and supervision in a well-regulated financial market. Listed bodies are also required to comply with listing rules that provide a range of protections to investors. In these circumstances, we consider there is less risk associated with reduced disclosure tailored to an employee incentive scheme. RG 49.21 [CO 14/1000] contains a list of approved foreign markets that we consider to be comparable to ASX in terms of being fair, efficient, well informed and internationally competitive. We have had particular regard to whether the market: (a) is a member of the World Federation of Exchanges; (b) is internationally recognised; (c) has rules that meet ASX’s listing and quotation, market information, regulatory, and trading and settlement principles; (d) is a key world trading centre; and Page 12 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 12 (e) is overseen by a government regulatory authority. Note: These criteria are set out in Regulatory Guide 72 Foreign securities: Disclosure relief (RG 72). See the ‘Key terms’ list for our definition of ‘approved foreign market’. RG 49.22 Our relief applies only to the main board of the markets listed in the class order definition of ‘eligible financial market’, unless otherwise stated. We will continue to consider applications for relief on a case-by-case basis in relation to other markets, including other prescribed financial markets. Foreign bodies RG 49.23 Our relief applies to offers of eligible products by ‘bodies’, which includes foreign bodies. The relief and conditions apply only to the extent that there is a ‘jurisdictional nexus’ between an offer or conduct and the Corporations Act, whether or not a broader global arrangement exists between the body and other people. That is, the disclosure relief applies to offers that are received in this jurisdiction, the licensing relief applies to conduct that amounts to carrying on a financial services business in this jurisdiction and other relief relates to conduct that occurs in this jurisdiction. RG 49.24 We are aware that complying with the disclosure requirements of the Corporations Act or the conditions of our class relief may be disproportionately onerous for some foreign issuers in the context of offers made to a small number of Australian employees under a multinational employee incentive scheme. On this basis, we will consider individual relief in exceptional circumstances for employee incentive schemes that do not meet certain conditions of our relief, provided that they meet our policy objectives set out in RG 49.4. Associated bodies corporate of listed bodies RG 49.25 It is relatively common for a body to offer an employee incentive scheme to employees of a related body corporate because they are part of the same corporate group. Bodies may also wish to offer a scheme to employees of a body they have a close connection with (e.g. where an issuing body has a significant investment in the employer body or the employer body has a significant investment in the issuing body, such as may arise in a joint venture arrangement). RG 49.26 We are prepared to grant relief for employee incentive schemes that are offered by a body that has a sufficient connection with the employer so that the offer will enhance interdependence between the employer and its employees. Note: In this regulatory guide, unless we need to make a distinction between employees and other personnel, ‘employees’ and ‘participants’ are interchangeable and mean any person eligible to participate in the employee incentive scheme under our relief. Page 13 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 13 RG 49.27 [CO 14/1000] applies to offers made by a body that is listed on an eligible financial market and its associated bodies corporate. Our class order defines an ‘associated body corporate’ to mean a body corporate: (a) that is a related body corporate of the body; (b) that has voting power in the body of not less than 20%; or (c) in which the body has voting power of not less than 20%. Note: In this regulatory guide, unless we need to make a distinction between the listed body and its associated body corporate, we refer to them simply as the ‘body’, the ‘employer’ or the ‘issuer’. RG 49.28 To rely on our general disclosure relief and meet the quotation condition, the body issuing the eligible products must be listed. However, the associated bodies corporate do not have to be listed. Page 14 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 14 C Listed bodies: Who can participate in offers? Key points Employee incentive schemes usually involve the listed body making offers to its employees. However, employers may seek to make offers to personnel engaged in different capacities. Our relief will extend to such personnel where we are satisfied that an equivalent level of interdependence can be achieved. [CO 14/1000] provides general disclosure relief for offers by listed bodies or their associated bodies corporate under employee incentive schemes made to ‘eligible participants’. This term is defined to include: • full-time or part-time employees (including executive directors); • non-executive directors; and • contractors or casual employees who meet the conditions relating to their hours worked (i.e. 40% of a full-time equivalent position). Offers may also be made to prospective participants—on the condition that they accept a position. Who can participate in an employee incentive scheme? RG 49.29 We are prepared to grant general disclosure relief for employee incentive schemes where the employee incentive arrangement is designed to support interdependence between the employer and its employees for their long-term mutual benefit by aligning their respective interests to enhance shareholder value. The nature of the economic interest and working relationship (past, current and future) is a key factor in determining whether these policy objectives are satisfied. RG 49.30 Under [CO 14/1000], offers may be made to a broad range of eligible participants, including current employees and other personnel who meet criteria that relate to their personal service, even where their personal services are engaged via a body corporate of which the person is a director or the spouse of a director. RG 49.31 For the purposes of [CO 14/1000], eligible participants are: (a) full-time or part-time employees (including executive directors); (b) non-executive directors; and (c) contractors and casual employees who work a pro-rata equivalent of 40% or more of a comparable full-time position. RG 49.32 There may be rare instances where we grant individual relief for offers to people who do not meet our definition of ‘eligible participant’, if the offer Page 15 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 15 satisfies our policy objectives. The body would need to demonstrate, to our satisfaction, that the failure to meet our criteria is not material in the circumstances, or that the failure to meet these criteria may be compensated for by other indicators of an interdependent working relationship. Full-time and part-time employees RG 49.33 [CO 14/1000] permits an offer under an employee incentive scheme of eligible products to persons who are full-time or part-time employees at the time of the offer. This includes executive directors and other senior managers through to junior employees. Contractors RG 49.34 We are prepared to give relief to a range of contractors who have a sufficient level of interdependence with the body. We have set the threshold level of interdependence for relief at being contracted to work the pro-rata equivalent of 40% or more of a comparable full-time position. RG 49.35 Our class order recognises that work relationships for contractors can take various forms. Our relief is designed to cover contractors who enter into service arrangements with the employer: (a) directly in their individual capacity; or (b) through a company (e.g. a small family-owned company or a corporate trustee of a family trust) where the individual who performs the work is a director or the spouse of a director of that company. Casual employees RG 49.36 [CO 14/1000] permits an offer of eligible products to casual employees where they are, or might reasonably be expected to be, engaged to work the pro-rata equivalent of 40% or more of a comparable full-time position. RG 49.37 We consider that these criteria indicate a relationship of sufficient interdependence to be covered by our relief. For individual relief applications, we may be prepared to consider different indicators. For example, a casual employee may work fewer hours per week but has a history of working for the employer on this basis over a long timeframe. Directors RG 49.38 The Corporations Act provides exemptions from the requirement to provide a disclosure document to senior managers who are offered securities (s708(12)) or a Product Disclosure Statement (PDS) in a recommendation situation in relation to a managed investment product (s1012D(9B)). These exemptions have been extended by Class Order [CO 04/899] Definition of Page 16 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 16 ‘senior manager’—modification to include directors—including those with executive positions and those who are non-executive directors. RG 49.39 These statutory exemptions therefore permit bodies to implement employee incentive schemes that offer such financial products to both executive directors and non-executive directors without the need for a disclosure document. RG 49.40 However, the statutory exemptions do not provide certain types of relief for some consequential or incidental activities. [CO 14/1000] provides relief for employee incentive schemes to be offered to directors, including non- executive directors, but does not extend to offers made under the statutory exemptions. RG 49.41 We note that corporate governance principles recommend that bodies should not offer to non-executive directors employee incentive schemes designed for executives (i.e. schemes that contain performance-based features). Note: See ASX, Corporate governance principles and recommendations, 3rd edition, 2014, Recommendation 8.2; Investment and Financial Services Association Limited (IFSA), Corporate governance: A guide for fund managers and corporations (IFSA Blue Book), June 2009, Guideline 11.12; Australian Council of Superannuation Investors (ACSI), Governance guidelines: A guide for superannuation funds to monitor listed Australian companies, July 2013, paragraphs 16.1 and 16.2; and Australian Institute of Company Directors, policy paper, Non-executive director remuneration, 9 January 2003. RG 49.42 [CO 14/1000] also does not provide relief from the remuneration-related reporting obligations under the Corporations Act (e.g. s300 and 300A). Directors and bodies will need to continue to comply with these obligations. Prospective participants RG 49.43 [CO 14/1000] permits bodies to make offers to prospective participants where the offer is conditional on acceptance of an offer of engagement as an employee, a contractor or a casual employee: RG 49.33–RG 49.37. Note: See also advertising and hawking relief in Section H. Renouncement by eligible participants RG 49.44 [CO 14/1000] also provides that, where an eligible participant renounces an offer in favour of a person listed below, the offer will still be treated as an offer of eligible products to an eligible participant: (a) an immediate family member of the eligible participant; (b) a company whose members comprise no persons other than the eligible participant or immediate family members of the participant; or Page 17 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 17 (c) a corporate trustee of a self-managed superannuation fund (within the meaning of the Superannuation Industry (Supervision) Act 1993), where the eligible participant is a director of the trustee. RG 49.45 We are prepared to extend our relief to cover a renouncement made by an eligible participant in favour of one of the above persons because we consider them to be sufficiently related to the eligible participant to meet the objective of interdependence and long-term mutual benefit. Page 18 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 18 D Listed bodies: What financial products can be offered? Key points We will facilitate offers of financial products under employee incentive schemes where the financial product offered is capable of reinforcing the interdependent relationship between an employer and its employees for long-term mutual benefit, and where there is appropriate disclosure and pricing information about the financial products that are being offered. [CO 14/1000] provides general disclosure relief for offers by listed bodies or their associated bodies corporate of the following ‘eligible products’: • fully paid ordinary shares in a class able to be traded on ASX and fully paid ordinary shares or stocks in a class able to be traded on an approved foreign market; • depository interests in fully paid shares or stocks where the interest is in a class able to be traded on an eligible financial market or is convertible into fully paid shares or stocks that are in a class able to be traded on an eligible financial market; • fully paid units in registered managed investment schemes (registered schemes) in a class able to be traded on ASX; • fully paid stapled securities in a class able to be traded on ASX; • units in any of the financial products mentioned above; • options to acquire any of the above financial products; and • incentive rights relating to any of the above financial products (excluding options). Main criteria for eligible products of listed bodies RG 49.46 When determining whether to provide relief for an offer of financial products to eligible participants, we focus on the following criteria: (a) whether the financial product is likely to support interdependence between the employer and its employees for their long-term mutual benefit—either because of the nature of the product or the terms on which it is offered (see RG 49.48–RG 49.50); (b) whether there is adequate information about the financial product to justify removing the requirement for a disclosure document (see RG 49.51–RG 49.52); and (c) whether the financial product, or the terms on which it is offered, are likely to expose the employee to additional liability (see RG 49.53– RG 49.54). Page 19 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 19 RG 49.47 These criteria are reflected in [CO 14/1000], as explained in this section. If an employee incentive scheme does not satisfy one or more of these criteria, we will consider granting more limited relief if the objectives of our policy are satisfied. An example of where we are prepared to provide more limited relief is in the case of offers by unlisted bodies in [CO 14/1001]: see Section G. Financial products that support interdependence RG 49.48 [CO 14/1000] covers a range of financial products that have the potential to support interdependence between an employer and its employees. The primary forms of financial products covered by our relief are those that give the employee an ownership interest (or the economic equivalent) in their employer. This includes shares or stocks, units in a registered scheme and equity-related depository interests, but does not include debt products because the price of a debt interest may not reflect the performance of the issuer, and holding a debt interest may not support interdependence between the employer and its employees. RG 49.49 Our relief can also apply to offers of products by foreign bodies that may be known by a different term in another jurisdiction (e.g. ‘stocks’). We look at the characteristics of the product rather than the label when determining whether it will meet the definition of ‘eligible product’. RG 49.50 We also give relief for offers of options and incentive rights that may ultimately result in the employee receiving an ownership interest or a financial benefit, the value of which is determined, in whole or in part, from the underlying eligible products. This relief is given where the employee incentive scheme is designed to support interdependence between the employer and the employees for their long-term mutual benefit and to enhance shareholder value. Quoted eligible products RG 49.51 Our general disclosure relief applies to: (a) eligible products that are in a class that has been quoted, at the time of the offer, on an eligible financial market for at least three months without suspension for more than five trading days in the shorter of the period in which the financial products have been quoted or the 12 months before the offer is made; and (b) options and incentive rights where the underlying eligible products meet this quotation condition. RG 49.52 The quotation requirement means that employees can assess the offer by reference to a reliable market price: see RG 49.101–RG 49.103. Page 20 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 20 Financial products that may expose the employee to liability RG 49.53 We have not given relief for offers of partly paid securities because of the risk that employees might be exposed to additional liability (other than the loss of the value of the financial products that are the subject of the arrangement). Particular risks associated with these offers mean that reduced disclosure will not generally be appropriate. RG 49.54 For this reason, [CO 14/1000] does not provide relief for employee incentive schemes that involve loans to employees, unless the loans are on terms that are limited recourse or no recourse and the loan is fee free and interest free: see RG 49.97–RG 49.98. Units in registered schemes and stapled securities RG 49.55 [CO 14/1000] permits employers to offer units in registered schemes and fully paid stapled securities that are able to be traded on ASX. RG 49.56 We also give relief for options over and incentive rights relating to these units and stapled securities. RG 49.57 We are prepared to give relief for the above units in registered schemes where the employee incentive scheme allows for the alignment of employer and employee interests in a similar way to shares, because they provide an economic equivalent of ownership in a body. RG 49.58 We will consider, on a case-by-case basis, relief applications for offers made under an employee incentive scheme of units in a foreign collective investment scheme. Depository interests RG 49.59 Foreign bodies may want to offer equity-based depository interests to their employees—for example, because these provide exposure to a more liquid market, or to address regulatory and administrative issues with offering electronic holdings in a number of jurisdictions. RG 49.60 [CO 14/1000] facilitates offers of beneficial interests (commonly referred to as ‘depository interests’) that are quoted on an eligible financial market—for example, CHESS Depository Interests (Australian CDIs), UK depository interests and American depositary receipts (ADRs)—where the underlying security is a share or stock. Note: Our relief for ADRs is limited to Level II and Level III ADRs. This is because Level I ADRs are not able to be traded on a recognised exchange and have very limited filing requirements. Levels I, II and III are defined under the Rules of the US Securities and Exchange Commission. Page 21 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 21 RG 49.61 We are prepared to give relief for these depository interests because: (a) they allow for the alignment of employer and employee interests in a similar way to shares, because they provide an economic equivalent of ownership in a body; and (b) without our relief, employees in Australia may be excluded from multinational offers because of the disproportionate cost of complying with the disclosure (and other) requirements of the Corporations Act, often for a relatively small number of Australian employees. RG 49.62 Our relief applies to quoted depository interests and shares or stocks that can be converted into such depository interests (i.e. whether or not the shares or stocks are quoted). This is because the depository interest is the economic equivalent of the underlying security and employees can readily convert the underlying security into a depository interest if they wish to trade their interests. RG 49.63 Our relief does not cover depository interests over debt instruments (e.g. bonds) because these are not the economic equivalent to underlying shares or stocks. Options RG 49.64 [CO 14/1000] gives general relief for offers of options over ‘underlying eligible products’ (i.e. financial products that are quoted on an eligible financial market). RG 49.65 The class order does not provide relief for the offer of options over options or options over incentive rights. This is because we consider that determining the value of such financial products would be difficult for many participants. RG 49.66 The options do not need to be quoted on an eligible financial market but the underlying eligible product must be in a class that is quoted on an eligible financial market. RG 49.67 Unless the options are in a class that is quoted on an eligible financial market, the options must be offered to participants for no more than nominal monetary consideration (and cannot be acquired, for example, via a contribution plan). This is again because determining the value of unquoted options would be difficult for many participants. Incentive rights RG 49.68 We consider that incentive rights, which generally constitute a financial product that is a derivative under Ch 7 the Corporations Act, can be structured in a way that is economically equivalent to options. Accordingly, [CO 14/1000] gives relief for offers of incentive rights where the value of Page 22 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 22 the incentive right is determined by reference to the same underlying eligible products as those that apply to options. RG 49.69 Correspondingly, the class order does not provide relief for the offer of incentive rights over options or incentive rights over incentive rights. RG 49.70 As with options, the incentive rights must also be offered to participants for no more than nominal monetary consideration (and cannot be acquired, for example, via a contribution plan) for the same reason (i.e. that they are not quoted on an eligible financial market and are therefore more difficult to value). RG 49.71 Under [CO 14/1000], a body can offer incentive rights, where they provide a conditional right: (a) to acquire (by issue or transfer) underlying eligible products—the number of underlying eligible products to be issued or transferred can be a specified number or can be determined with a formula that uses, or represents, the financial value of the underlying eligible product (e.g. a volume-weighted average price, the value of any share price appreciation, or return on equity); (b) to be paid a cash amount where the value of that cash amount is ultimately determined (either wholly or in part) with a formula that uses, or represents, the financial value of the underlying eligible product (e.g. a volume-weighted average price, the value of any share price appreciation, or return on equity); or (c) to receive a combination of RG 49.71(a)–RG 49.71(b). Units RG 49.72 [CO 14/1000] also gives relief for offers of units in underlying eligible products. Generally, where the units in the underlying eligible products are not able to be traded on an eligible financial market, they must be offered to participants for no more than nominal monetary consideration (and cannot be acquired, for example, via a contribution plan). Trust arrangements RG 49.73 Where a trustee holds eligible products on behalf of eligible participants, the eligible participant may arguably hold a unit in the eligible product by virtue of the trust arrangements, and that unit is not able to be traded. In these cases, where the underlying eligible product is able to be traded, it may be offered for more than nominal monetary consideration. This is because we consider the eligible participant to be making a monetary contribution to acquire the underlying eligible product and not to be making a monetary contribution towards the unit. Page 23 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 23 Other financial products RG 49.74 [CO 14/1000] does not extend to financial products other than those defined above either because we have not received any, or many, applications in relation to other financial products, or we have not assessed whether they are equivalent to those which have been included. We will continue to consider on a case-by-case basis whether our policy objectives are satisfied for offers of other financial products. Commissions and cash bonuses RG 49.75 We consider that cash payments made under employment or employment- like arrangements—where the value of the cash payment is determined by measures unrelated to underlying financial products, such as a volume-based sales commission or bonus—are not intended to be regulated by Ch 7. Accordingly, we have not included offers involving such arrangements in our class order. We consider that, if these arrangements are not caught by Ch 7, no relief is required. Page 24 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 24 E Listed bodies: What structures can be used? Key points Employee incentive schemes adopt a number of structures for various reasons, including administrative efficiencies, tax concessions, and contractual and equitable protection for the listed body and participants. Our policy facilitates the use of some of these structures where the rights of participants are adequately protected. [CO 14/1000] provides relief for arrangements that listed bodies often use to manage their offers and to facilitate employee incentive schemes. This includes relief for: • trust arrangements; • contribution plans; and • loan arrangements. Our approach to the structure of offers RG 49.76 We consider that employers should have the flexibility to structure their arrangements in ways that are more efficient or beneficial, provided that those structures do not undermine ASIC’s policy objectives for employee incentive schemes. RG 49.77 [CO 14/1000] gives relief from a number of the requirements in the Corporations Act so that employers can: (a) use a trust arrangement to manage their obligations under an employee incentive scheme; and (b) offer a range of payment options to participants, such as contribution plans and loan arrangements. RG 49.78 We may be prepared to give individual relief for other types of structures if an employer can demonstrate why a particular structure or feature is warranted, and we are satisfied that this is consistent with our policy objectives. Trusts RG 49.79 Bodies often use trust arrangements to help manage their obligation to have sufficient underlying eligible products available for delivery to participants on the fulfilment of conditions, the exercise of options or the vesting of incentive rights. Using a trust also avoids the requirement to cancel shares if the issuer were to buy back shares under Div 2 of Pt 2J. The trust Page 25 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 25 arrangement is eligible to rely on [CO 14/1000], even if the trust is also being used for an employee incentive scheme, or similar scheme, that is not relying on [CO 14/1000]. RG 49.80 Accumulating underlying eligible products in a trust allows the employer to spread the timing of acquisitions to take advantage of open trading periods and to avoid the pricing implications of having to make larger on-market acquisitions at a particular point in time. RG 49.81 A trustee may hold underlying financial products on an allocated basis. This means that these products are being held for specific employees. Depending on the design of the trust, the underlying financial products may be recorded as held for a particular beneficiary, where the beneficiary has no particular entitlements—alternatively, the beneficiary may have the right to direct the trustee how to vote and have a right to receive dividends. A trustee may also hold the underlying financial products on an unallocated basis, which means that the products are being held in a pool for participating employees generally. RG 49.82 If an employee incentive scheme involves a trust, relief from the requirement to hold an AFS licence may be required when providing a custodial or depository service, and for dealing in a financial product in the course of providing such a service. [CO 14/1000] provides conditional relief from this requirement for listed bodies and their associated bodies corporate on condition that the financial service is merely incidental to the operation of an employee incentive scheme. Note 1: For more information on custodial and depository services, see RG 49.178– RG 49.179. Note 2: If the trustee is a body controlled by the issuer, it must also comply with the self-acquisition provisions in Pt 2J.2: see Regulatory Guide 233 Indirect self- acquisition: Relief for investment funds (RG 233). RG 49.83 Many bodies use professional trustees to assist them to operate or manage their offers. Our licensing relief does not apply to bodies that provide professional trustee services because they are required to have the appropriate AFS licence authorisations. We will consider individual relief for foreign professional trustees who are authorised to provide trustee services in their home jurisdiction and other foreign jurisdictions: see RG 49.173. Conditions applying to trusts RG 49.84 Our licensing relief in [CO 14/1000] for trust arrangements is subject to conditions that provide certain investor protections, including that: (a) the activities of the trust are limited to holding underlying eligible products for participants who may become entitled to those products under an employee incentive scheme or similar scheme; Page 26 REGULATORY GUIDE 49: Employee incentive schemes © Australian Securities and Investments Commission November 2015 Page 26 (b) the trustee must maintain written records on the administration of the trust and keep details of the underlying eligible products if these are being held for a specified eligible participant on an allocated basis; (c) the trustee must not levy any fees for operating the trust that are payable by beneficiaries or out of the trust assets (other than reasonable disbursements including brokerage and taxes in connection with the trust); (d) if the trustee is the listed body, or an associate of the body, the trustee is not entitled, at its own discretion, to exercise any voting rights attaching to the underlying financial products held on trust (see RG 49.85); and (e) the trustee must not hold more than 5% of the issued capital of the listed body on trust in reliance on ASIC’s employee incentive scheme relief (see RG 49.86). RG 49.85 Where the trustee is the listed body, or an associate—as defined in Div 2 of Pt 1.2 (except s12 and 16)—of the listed body, the trustee must not exercise its own discretion in relation to voting rights attaching to the underlying eligible products. This prohibition applies even where the beneficiary has a right to direct the trustee how to vote but does not exercise this right. RG 49.86 The imposition of a 5% holding limit is to limit the distortion of voting power caused by the trustee holding a parcel of financial products that may effectively be quarantined from voting. The 5% limit is calculated based on holdings of voting shares or voting interests that relate to employee incentive schemes that rely on our class relief or on individual relief. Where the trustee is not the listed body, or an associate of the listed body, the trustee may, subject to the terms of the trust, exercise its own discretion in relation to voting rights attaching to the underlying eligible products in accordance with its fiduciary