Corporate Update - April 2007.

Contents Employee Share Plans In Australia

Corporate Social Responsibility: CAMAC Recommends No Legislative Change

Employee Share Plans In Australia

The current corporate regulatory framework read more... and its impact on the number of employee share plans implemented by Australian companies has been an issue of widespread interest.

Report On Employee Share Ownership Plans In Australia Last month, the report "Employee share ownership plans in Australia: The Corporate Law Framework" was jointly published by the Centre for Corporate Law and Securities Regulation, the Centre for Employment and Labour Relations Law and The Tax Group, the University of Melbourne (Report). The Report is the latest addition to this debate.

The Report examines the regulatory framework governing employee share plans and identifies criticism of the current corporate regulatory framework.

The Report suggests that while the current framework offers protection to employees who are considering taking up shares in companies, the requirements in the Corporations Act 2001 are "generally ill-suited to serving the different objectives for which companies implement employee share ownership plans", in recognition of which ASIC provides some conditional relief from certain provisions of the Corporations Act 2001.

The Report concludes that more work needs to be done to understand whether current employee share ownership practice in Australia is a result of the constraints imposed by the corporate law regulatory regime.

Current Corporate Law Regulatory Regime - A Reminder Some of the matters which should be considered when proposing the implementation of an employee share scheme include the following:

The Corporations Act 2001 requires the issue of a disclosure document in respect of any offer of shares or options, unless the offer is exempt under either a statutory or administrative exemption.

Of the statutory exemptions available, of particular relevance is the exemption applicable to offers to executive officers of a body. In addition, no disclosure document is required for a personal offer of securities of a body where the offer does not result in the number of people to whom securities of the body have been issued exceeding 20 in any 12 month period and the amount raised by the body by issuing the securities exceeding A$2 million in any 12 month period.

If the entity offering securities does not qualify for a statutory exemption, it may nevertheless qualify for an administrative exemption. ASIC has issued a class order which sets out the circumstances under which relief from disclosure and other requirements will be given to offers of securities under an employee share scheme.

A plan may involve the body lending money to employees to acquire shares under the plan. The Corporations Act 2001 restricts a company from financially assisting a person to acquire shares in a company or its holding company. However, financial assistance given under an employee share scheme that has been approved by a resolution passed at a general meeting of the company is generally exempt from the restriction.

Except as permitted by the Corporations Act 2001, an Australian public company (whether listed or not) must not, without shareholder approval, give a financial benefit (including issuing shares) to a related party, which includes a director. There are several statutory exemptions, including where the benefit is reasonable remuneration given to a related party as an officer or employee of the company.

For listed companies, while there is no longer a requirement to obtain shareholder approval for the introduction of a new employee share plan (or the amendment of an existing plan), there are restrictions under the ASX Listing Rules from issuing securities to directors under employee incentive schemes without shareholder approval.

The administration of an employee share scheme is likely to involve financial services which require the administrator to obtain an Australian Financial Services Licence (AFSL). Such financial services may include financial product advice (eg. where an offer document contains advice about the scheme), dealing in a financial product or custodial or depository service (eg. if the scheme involves a trust structure and the trust holds securities on behalf of employees). ASIC provides conditional relief from the requirement to hold an AFSL for certain incidental financial services provided in connection with employee share schemes.

If there is a shareholders' agreement in place, it should be ensured that any employee shareholder is bound by that agreement.

Corporate Social Responsibility: CAMAC Recommends No Legislative Change The latest report of the Federal Government's Corporations and Markets' Advisory Committee (CAMAC) on the social responsibility of corporations released late last year (Report) concluded that no significant change to the Corporations Act 2001 (Corporations Act) is necessary to encourage companies and their directors to make decisions in a socially responsible manner.

The Report concluded that no amendment to the Corporations Act is required as the current framework already allows directors to consider interests of the community and other stakeholders. This position may be contrasted to the Companies Act 2006 in the UK which requires directors to consider a range of matters, including social and environmental considerations, in discharging directors' duties.

The Report pointed out that "transparency is a cornerstone of responsibility in the operation of corporate businesses". In terms of reporting, there is currently no mandatory requirement in Australia for companies to report or make disclosure on the social and environmental impact of their activities, otherwise known as sustainability reporting.

However, s 299A of the Corporations Act requires listed public companies to include an operating and financial review, and information on business strategies and future prospects in the annual directors' report.

The Report suggested that s 299A is an appropriate platform for further development of reporting on corporate social responsibility issues, and that there is no current need for amending the existing reporting requirements. This position may be contrasted to the mandatory disclosure requirements contained in the Securities and Exchange Commission regulations in the US and the Companies Act in the UK.

However, the Report recommends that current reporting requirement be extended beyond listed public companies to other listed entities (ie. listed managed investment schemes).

Aside from the technical requirements for reporting under the Corporations Act, many companies (not just the larger publicly listed companies) are now adopting extensive reporting measures in respect of social and environment matters in any event, as a result of increasing pressure to report publicly on their social and environmental performance. Such pressure comes from a number of sources, including self-regulatory mechanisms (eg. signing up to third party codes and standards) and increasingly close scrutiny from governments, financial institutions, the media and non-governmental organisations.

> The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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