ESS Disclosure Requirements – A Roadmap (Part 3 – Loan Plans, Contribution Plans, Plans Involving ESOP Trusts)

This article is Part 3 in a 3-part series on employee share scheme requirements under Part 7.12 Subdivision 1A of the Corporations Act 2001 (Cth) (the Act). This article looks at the requirements for private companies with ESS plans involving loan plans, contribution plans, or plans involving ESOP trusts.

To read Part 1 of this series, which deals with when Part 7.12 Subdivision 1A applies, you can find our article here.

To read Part 2, which looks at the disclosure requirements for private companies that, due to the operation of section 1100Q of the Act, are required to make disclosures, you can find our article here.

Introduction

Employee Share Schemes (ESS), also known as ESOPs, involve a company issuing securities (usually shares or options) to employees. Under part 6.2D of the Act, any time a company is issuing securities it has to comply with onerous disclosure obligations unless an exemption applies. Part 7.12 Subdivision 1A (the Division) of the Act sets out a framework which, if complied with, enables a company to avoid Part 6.2D.

However, this doesn’t mean that a company automatically avoids disclosure obligations all together. If a private company falls under section 1100Q of the Act, it is required to make disclosure in accordance with sections 1100W, 1100X, 1100Y and 1100Z. To see where an offer falls under section 1100Q of the Act, read Part 1 here. To see what disclosure obligations apply, read Part 2 here.

Whether or not disclosure obligations apply, specific rules apply for private companies partaking in ESSs that involve contribution plans, loan plans, or ESOP trusts.

Contribution Plans

A contribution plan is any plan under which the participating employee or service providing acquires interest in the ESS by making regular payments, or having regular deductions made from their salary or wages. As the ESS interests are made in consideration of ongoing contributions, it is an offer that falls under section 1100Q of the Act and therefore requires disclosure (see more in Part 2 of this series).

For a contribution plan to leverage the relief under the Division, it must comply with the following requirements under section 1100T of the Act:

1. It must allow the participant to make regular payments, or have deductions made from its salary or wages, to acquire the ESS interests;
2. To the extent contributions are made in advance of the ESS interests being issued, the money must be held by an Australian authorised deposit taking institution (ADI).
3. The ESS participant must have the option to elect to discontinue the regular contributions, in which case:
   1. Any deductions from the participant’s salary or wages must immediately cease;
   2. If any deductions are made after the participant elects to discontinue contributions, they must be repaid within 45 days of the election being made;
   3. Within 45 days, any amount collected in the ADI and not yet applied to acquire an ESS interest must be refunded to the participant, along with any interest that has accrued in the ADI account.
4. The ESS participant must agree in writing to the terms of the plan before participating.

Further, in complying with the disclosure requirements as set out in Part 2:

1. The full terms of the contribution plan must be disclosed to the participant when the company makes disclosure; or
2. A summary of the terms of the plan may be included instead, with a statement that a full copy of the terms will be provided to the participant; and
3. If the offer document disclosed only includes a summary of the terms of the plan, the full terms must be disclosed to the participant within 10 business days of the participant’s request.

Loan

It is not uncommon for companies to implement loan funded share plan (LFSP) in relation to the ESS. In this scenario, the company loans the participant the funds to acquire the ESS interests. For a LFSP to rely on the relief under the Division, it must comply with the following requirements under section 1100U of the Act:

1. The loan must be interest free with no additional fees;
2. The company’s only recourse if the participant defaults on the loan is limited to acquiring the ESS interests acquired by the participant using the loan;
3. The borrower under the loan must be the ESS participant (ie, not a nominated third party entity); and
4. The ESS participant must not be a shareholder of the company.

Further, in complying with the disclosure requirements as set out in Part 2:

1. The full terms of the loan must be disclosed to the participant when the company makes disclosure; or
2. A summary of the terms of the loan may be included instead, with a statement that a full copy of the terms will be provided to the participant; and
3. If the offer document disclosed only includes a summary of the terms of the loan, the full terms must be disclosed to the participant within 10 business days of the participant’s request.

Trust Requirements

Often, companies will manage their ESS plans through an ESS trust. In this scenario, the trustee holds all the ESS interests on behalf of the participants, who are beneficiaries in the trust. The benefit of this is, among other things, keeping the company’s cap table tidy.

Where a company is issuing ESS interests through a trust, to rely on the relief under the Division the trust must comply with the following under section 1100S of the Act:

1. The trustee acquires the ESS interest for the purpose of (ultimately) transferring the interest to the participant; and
2. The trust deed of the trust sets out the following:
   1. The activities of the trustee must be limited to managing the company’s ESSs. For this reason, a special purpose entity must be set up to act as trustee;
   2. The trustee must be required to keep written records of its administration of the trust;
   3. The trustee may not charge any fees for acting as trustee, other than;
      1. Reasonable disbursements (such as accountant’s fees); or
      2. Amounts charged to the company (ie, not the beneficiaries).
   4. If the trustee is an associated entity of the company (which will usually be the case), the trustee may only exercise any voting rights associated with ESS interests in accordance with the beneficiaries’ instructions.

Further, in complying with the disclosure requirements as set out in Part 2:

1. The trust deed must be disclosed to the participant when the company makes disclosure; or
2. A summary of the terms of the trust deed may be included instead, with a statement that a full copy of the trust deed will be provided to the participant; and
3. If the offer document disclosed only includes a summary of the terms of the trust deed, the full trust deed must be disclosed to the participant within 10 business days of the participant’s request.

Revocation of Relief

The Division also sets out circumstances in which a company’s ability to rely on the relief under the Division may be revoked. This includes circumstances where ESSs involving LFSPs, contribution plans, or ESS trusts cease complying with the requirements under the Division and set out above. Therefore, it is crucial that compliance with the above is ongoing so that the relief can continue to be relied on.

Reach Out

If you are looking to implement an ESS for your company, or if you have received an offer to participate in an ESS and want to know what your rights and obligations are, and the ESS includes LFSPs, contribution plans, or an ESS trust, our team of commercial law experts at Allied Legal can help. We have in depth expertise when it comes to assisting startups with preparing and implementing ESSs and complying with requirements under the Act. 

You can connect with one of our commercial law experts by giving us a call on (03) 8691 3111 or sending us an email at hello@alliedlegal.com.au.