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Understanding the New Employee Share Option Plan (ESOP) Disclosure Exemptions

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If you are considering setting up an Employee Share Option Plan (ESOP), you should be aware of the new legislation that reduces red tape for startups managing their ESOP from the 1st of October 2022. Previously, startup owners who wanted to offer shares to more than 20 employees in a 12-month period (excluding offers to senior managers) had to comply with onerous disclosure obligations. Under the new changes to the Corporations Act 2001 (Corporations Act), startups no longer have to comply with those existing disclosure obligations, provided they structure their ESOP offers according to the new employee share scheme disclosure exemptions. This article explains the new rules and what is required for your company to comply with the new rules.

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ESOP Requirements and Offers Made Under Your ESOP

Generally, if participants in your ESOP have to pay to acquire their shares or options, then the terms of your ESOP and the offers made under your ESOP must meet the following requirements. 

1. ESOP Terms 

Firstly, the participants in your ESOP must fall within specific classes of persons. These eligible participants include directors, employees and other service providers. 

Secondly, the securities you issue under your ESOP must be ESS Interests per the Corporations Act. In this sense, ESS interests include fully paid shares and options to acquire fully paid shares. 

2. Terms of the Offer Made Under the ESOP

The terms of the offer made under the ESOP must comply with an issue cap. An issue cap refers to the total number of shares that can be issued under your ESOP. To comply with the issue cap at the time of making the relevant offer, you must reasonably believe that: 

  • the total number of fully paid shares that may be issued under that offer; and
  • the total number of shares that have been issued or could be issued under your ESOP in the previous three years, is not greater than 20% of the company’s total number of issued shares.  

You must keep track of the offers made under your ESOP to ensure you do not breach this cap. However, increasing the issue cap above 20% is possible if your company’s constitution allows it.

Additionally, the terms of the offer made under the ESOP must also comply with a monetary cap. A monetary cap refers to the total amount a participant can pay under your ESOP. 

To comply with the monetary cap, the amount the participants paid (or is payable) for their shares or options in the 12 months following the participant accepting their offer must not exceed AU$30,000, plus:

  • 70% of the value of the dividends the participant received, or a related person, 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 be accrued in respect of unexercised options over a 5-year period, up to a maximum accrual of $150,000.

Information You Must Provide Participants

If the terms of your ESOP and the relevant offer(s) meet the above requirements, you must provide certain simplified disclosure materials to participants under your ESOP at specific times.  

Materials You Must Provide On Offer

The materials you must provide when you offer shares or options to participants under your ESOP include the following. 

Offer StatementYou must include a statement that the offer is made under Division 1A of Part 7.12 of the Corporations Act.  
ESOP Offer DocumentThe 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;
+ a suggestion that the participant seeks their own 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, in the case of an offer of options, the rights attached to the shares to be acquired through the options). 
Supporting Information StatementIf your ESOP is an option plan, the offer letter you issue to participants should also include a statement that the options cannot be exercised 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 (see below). 

You must provide this information to the relevant participant 14 days before they can accept their offer. This means that offers should only be open for acceptance by participants 14 days after they receive their offer.

Simplified Disclosure Materials

You must provide participants with the following materials at least 14 days before they:

Financial InformationThis includes:
+ the financial report that your company must lodge with ASIC under the Corporations Act (if such a report exists); or
+ a balance sheet and profit and loss statement you have prepared following accounting standards. 
You should accompany this information with a statement that proves whether the financial information is audited.
Valued InformationYou must provide a copy of the valuation of the option or shares. The most common valuation method that companies will use is the methods approved for tax purposes, which includes:
+ 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 StatementYou must provide a statement that the company is solvent. 

You must provide these materials before the participant’s options become exercisable, even if they do not choose to exercise their option. Consequently, you should 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. 

Suppose your employee equity plan is a share plan and not an ESOP. In this instance, you must provide these materials when you issue shares to the participants. In other words, you must provide these materials at the same time you provide the offer document.

Trusts and Loans

There are other 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, speak to your lawyer.   

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Key Takeaways

If you are setting up an ESOP and want to make offers to more than 20 persons within 12 months, you should consider structuring your ESOP to ensure it complies with the new rules. This will help reduce the administrative burden of complying with these disclosure exemptions. 

While this article provides a broad summary of the new rules, this is a complex area of the law. If you need help making an ESOP offer that complies with the new disclosure exemptions, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is an ESOP?

An Employee Share Option Plan, or ESOP, allows business owners to allow their employees to acquire shares in their company in the future.

What are the new changes to ESOP rules?

Before the 1st of October, 2022, startups who wanted to offer shares to more than 20 employees in a 12-month period had to comply with onerous disclosure obligations. Under the new changes, startups no longer have to comply with those existing disclosure obligations, provided they structure their ESOP offers according to the new employee share scheme disclosure exemptions.

Zoe Mahon

Zoe Mahon


Zoe is a Lawyer in LegalVision’s Corporate Transactions team. She currently specialises in capital raising, with a particular focus on helping startups negotiate and prepare SAFEs, convertible notes and equity instruments. She also assists with general corporate matters and has previous experience in transactional tax.

Qualifications: Bachelor of Laws (Hons), Bachelor of Commerce, University of Auckland.

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About LegalVision

LegalVision is an innovative commercial law firm that provides businesses with affordable, unlimited and ongoing legal assistance through our membership. We operate in Australia, the United Kingdom and New Zealand.

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