How Listed Entities are Falling Foul of the New ESS Regime

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ASX entities who rely on Listing Rule exemptions to issue securities under their employee incentive schemes, and who also rely on the streamlined disclosure requirements in Division 1A of Part 7.12 of the Corporations Act may be inadvertently in breach of the provisions of the new employee share scheme regime (ESS Regime). Falling foul of the ESS Regime may result in a listed entity committing various breaches of, or offences under, the Corporations Act, and can lead to personal liability for certain persons, including directors.

One of the requirements of the new ESS Regime is that if monetary consideration is payable by a participant for the grant of securities (whether at the time of grant, or on exercise) then a listed entity must comply with the issue cap. Unless a higher cap is specified in the entity’s constitution, the default issue cap for listed entities is 5% of total shares on issue as at the date the offer is made (Issue Cap).  This means that if a listed entity’s constitution does not specify an issue cap at all (which is often the case), and the entity wishes to benefit from the regulatory relief provided by the new ESS Regime, then it must comply with the default 5% Issue Cap. If the Issue Cap is breached, then regulatory relief from the standard compliance and disclosure obligations under Parts 6D.2 and 6D.3 or 7.9 of the Corporations Act is revoked. 

The Issue Cap will not fit well for with listed entities, even if members approval is granted in accordance with Listing Rule 7.2 Exemption 13(b). That exemption excludes from the restrictions in Listing Rules 7.1 and 7.1A an issue of securities under an employee incentive scheme, if within 3 years before the issue date, the ordinary members have approved the issue under such a scheme. To qualify under that exemption requires, amongst other things, that the relevant notice of meeting specifies the maximum number of securities proposed to be issued under the employee share scheme in the relevant period. Under that exemption, the total amount that can be approved by members may therefore be greater than the 5% default Issue Cap.

Thus, some ASX entities may find themselves in the position that whilst their members have approved the issue of securities under an employee incentive scheme in accordance with the Listing Rules, that the company nonetheless runs afoul of the new ESS Regime.  This is simply by virtue of the fact that even if members have approved a maximum number of securities in accordance with the Listing Rules, if the actual number of securities issued exceeds either the default 5% Issue Cap (or any higher issue cap set out in the company’s constitution) then the entity may have breached the requirements of the ESS Regime (and regulatory relief is revoked). 

Compounding this untenable situation for many ASX companies is that member approval under the relevant Listing Rule exemption was obtained before the New Regime came into effect late 2022. Those unlucky companies may find themselves in the situation that they have already exceeded the Issue Cap and are wondering what they can do to make themselves compliant not only with the Corporations Act, but also the Listing Rules. 

Our experienced corporate lawyers are familiar with this issue and know how to deal with it. With the time for annual meetings fast approaching, now is the time to touch base with us to see how we can help you.


  • Kelly Tudhope

    Kelly is also an experienced regulatory compliance lawyer. She assists clients to navigate through the minefield of regulatory investigations, including those initiated by the Australian Competition and Consumer Commission. She advises on and responds to regulatory notices, advocates on behalf of clients and provides in-house corporate compliance training, policies, and procedures.

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