ESS Disclosure Requirements – A Roadmap (Part 2 – General Disclosure Requirements)

This article is Part 2 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 disclosure requirements for private companies that, due to the operation of section 1100Q of the Act, are required to make disclosures.

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 about specific requirements for loan plans, contribution plans, or plans involving ESOP trusts you can read Part 3 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.

Disclosure Requirements

To comply with disclosure requirements under sections 1100W and 1100X of the Act, a company’s ESS offer must (please note, the below only covers disclosure requirements likely to be relevant to startups and private companies. For a full list of the disclosures, please view sections 1100W and 1100X of the Act):

• Include the terms of the offer OR a summary of the terms, with a statement that the full terms will be provided to the recipient on request;
• Provide general information about the risks of acquiring and holding the offered securities;
• State that advice given in the offer is not tailored to the recipient’s personal situation;
• Recommends that the recipient obtains personal advice regarding the offer;
• States the duration for which the offer is open for acceptance;
• A statement that the interests may not have any value, and that the value will depend on uncertain future events;
• If the interests are in relation to interests other than ordinary shares, a description of the rights that attach to the interests;
• A statement that the company is solvent;
• A copy of the most recent report lodged with ASIC (if one exists);
• If no such report exists, a balance sheet and profit and loss statement prepared in accordance with the accounting standards or international accounting standards;
• A copy of a valuation of the ESS interest that has been prepared with a method approved by the Commissioner of Taxation.

Disclosure – Requirements and Timing

The disclosures made under sections 1100W and 1100X must also comply with the requirements set out under section 1100Y, which are as follows:

• The ESS participant may not be allowed to acquire interests under the offer until at least 14 days after the offer and disclosures set out above are made;
• If the ESS offer document only includes a summary of the offer, the full terms must be made within 10 days (we note that we would recommend including the full terms at the outset to ensure timely compliance with the requirements);

If the ESS interests are options, and monetary consideration is to be paid on the exercise of those options, the offer must include terms that, at least 14 days prior to the options being exercised AND 14 days prior to the options being eligible to be exercised, the participant is to be provided with:

• A copy of the most recent report lodged with ASIC or, if such a report does not exist, a balance sheet and profit and loss statement prepared in compliance with the accounting standards;
• A copy of a valuation of the ESS interest that has been prepared with a method approved by the Commissioner of Taxation;
• A statement that the company is solvent.

Not Misleading

As is the case any time a company is making disclosures, and as set out in section 1100Z of the Act, the disclosures and the ESS offer must not be misleading or deceptive. This also includes a requirement to not omit information which may result in the information being misleading or deceptive.

Further, the company making the offer is obligated to ensure that ESS participants are provided with updated offers/disclosures as soon as any information disclosed becomes outdated or no longer accurate.

Failure to provide accurate information, information that is not misleading or deceptive, or failure to provide updated information can result in ESS participants seeking monetary compensation from the company or the directors (including shadow directors).

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 you want to know what disclosure obligations may apply, 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 making offers to eligible participants.

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.