An Employee Share Option Plan (ESOP) is a scheme that companies can use to offer their eligible workers the option to purchase company shares at a specific price in the future. Under the Corporations Act 2001 (‘Corporations Act’), you must provide a disclosure document when offering shares or options to third parties. In the context of ESOPs, you must provide employees with the necessary disclosure to ensure they have the information needed to make informed investment decisions. This article outlines the ESOP requirements and, specifically, how your company can meet disclosure obligations.

What Are the Requirements for Your ESOP Offer?

If your ESOP requires participants to acquire shares or options by paying for them, your ESOP’s terms and the offers made under it must meet specific requirements.

1. ESOP Terms

First, ESOP participants must fall within specific classes of persons. For example, eligible participants include:

• directors;
• employees; or
• other service providers.

Second, the securities issued under your ESOP must be ’employee share scheme interests’, per the CA. Accordingly, employee share scheme interests include:

• fully paid shares; and
• options to acquire fully paid shares.

2. ESOP Offer

The terms of the offer made under the ESOP must comply with an issue cap and a monetary cap. The issue cap refers to the maximum number of shares your company can issue under the ESOP. To comply with the issue cap, you must reasonably believe, at the time of making the relevant offer, that you can issue the total number of fully paid shares under that offer and the total number of shares you have, or could have, issued under your ESOP in the previous three years is no greater than 20% of the company’s total issued shares.

Therefore, you must keep track of the offers made under your ESOP to stay within the cap. Nevertheless, you can increase the issue cap above 20% if your company’s constitution allows it. Additionally, the monetary cap refers to the total amount a participant can pay under your ESOP. The amount participants pay (or is payable) for their  shares or options cannot exceed $30,000 in the 12 months following the participant accepting their offer, plus:

• 70% of the dividend value the participant or a related person received in connection with the ESOP in those 12 months; and
• 70% of any cash bonuses the participant received in those 12 months.
• The monetary cap can accrue over 5 years up to a maximum accrual of $150,000.

What Information Do You Need to Provide?

If your ESOP and the relevant offers meet the above requirements, you must provide certain simplified disclosure materials to participants under your ESOP at specific times.

Offer Statement – You must include a statement that you are making the offer under Division 1A of Part 7.12 of the CA. The documents you must provide participants when they receive their offer must include:

• the terms of the offer;
• the risks of acquiring and holding the shares or options;
• a statement that advice concerning the offer does not take into account the participant’s specific objectives, financial situation
• and needs;

ESOP Offer Document – a suggestion that the participant seeks independent legal advice; a statement of the period during which the participant may accept the offer;  a statement that the shares or options may not have any value and that the value of the shares or options will depend on future events that may not occur; and a description of the rights attached to the shares or, for an offer of options, a description of the rights attached to the shares to be acquired through the options.

Supporting Information Statement – Suppose your ESOP is an option plan. If so, the offer letter you issue to participants must include a statement that they cannot exercise options unless you provide the “simplified disclosure materials” at least 14 days before the exercise of the option or the vesting of the right to exercise. You must provide this information to the relevant participant 14 days before they can accept their offer. As such, offers should only be open for acceptance by participants 14 days after they receive their offer.

Disclosure Materials – Further, your company must provide participants with the following materials at least 14 days before the participant either exercises their option; or the right to exercise vests.

Financial Information – Financial information includes the financial report that your company must lodge with ASIC under the CA (if such a report exists); or a balance sheet and profit and loss statement you have prepared following accounting standards. You should also provide a statement proving that you have had the financial information audited.

Valued Information – Provide a copy of the valuation of the option or shares. Common valuation methods are those approved for tax purpose the Net Tangible Assets method (if the company qualifies to use this); and a valuation that the company’s CFO or a qualified valuer performs.

Solvency Statement – You must provide a statement that the company is solvent. Your company must provide these materials before the participant’s options become exercisable, even if they do not choose to exercise their option. Consequently, consider whether to limit the dates on which options become exercisable under your ESOP by either nominating a specific exercise period each year or using an ESOP that only allows exercise upon an exit event rather than exercise upon vesting. If your employee equity plan is a share plan and not an ESOP, you must provide these materials when issuing shares to the participant. In other words, you must provide these materials when you give the offer document.

Other Requirements

There are further requirements you must meet if your ESOP includes:

• a trust arrangement; or
• if you help your employees acquire securities under your ESOP, such as by providing a loan.
• If your ESOP contains these features, you should speak to a qualified lawyer.

Key Takeaways

An ESOP allows you to offer your employees the opportunity to purchase shares at a future date under specific terms. To comply with the Corporations Act, you must provide disclosure documents to ensure your employees receive essential information before accepting any offers. Meeting the legal requirements for ESOPs also involves adhering to issue and monetary caps, and providing key financial and valuation details.

Additionally, you should ensure you fulfil any further obligations, such as trust arrangements or employee financial assistance.

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