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New Zealand Securities Commission |
Last Updated: 9 November 2014
PROPOSED EXEMPTION FOR EMPLOYEE SHARE PURCHASE SCHEMES OF UNLISTED COMPANIES
A DISCUSSION PAPER
SECURITIES
COMMISSION
17 August 2004
Contents:
Introduction
The existing class exemptions
Listed issuers
Specified unlisted issuers
Individual exemptions
Proposed class exemption
Extent and method of
disclosure
Eligible persons
Exit mechanisms
Cap on shares allotted
Request for comments
The Securities Commission seeks comments on a proposed extension of its class
exemption for employee share purchase schemes. We would
like comments by the end
of Tuesday 31 August 2004.
2.
The extension would include employee share schemes operated by unlisted New
Zealand companies in the class exemption. We propose that
the exemption for
these schemes will be subject to certain additional conditions, to reflect the
lesser amount of information provided
to shareholders of unlisted companies. We
seek comments on this proposal, and on the terms and conditions of the proposed
exemptions.
3.
The proposed exemption will not affect the exemption employee share purchase schemes of NZX listed issuers.
The existing class
exemptions
Listed Issuers
4.
There have been Commission exemptions for employee share schemes of listed issuers since 1986. The current exemption is the Securities Act (Employee Share Purchase Schemes) Exemption Notice 2002 (the "class exemption"). This exemption applies to listed companies who offer shares to "eligible persons", ie:
(a)
employees or directors of the company or its subsidiaries; or
(b)
people who provide personal services (other than as an employee) principally
to that company or its subsidiaries.
5.
The notice exempts listed issuers from the following parts of the law:
(a)
section 37A(1)(c) of the Securities Act - the effect of this is the registered prospectus has no fixed lifespan - it is an "evergreen" prospectus;
(b)
section 37A(2) of the Securities Act (now redundant, as section 37A(2) was repealed in April 2004);
(c)
clauses 4 to 20, 22 to 38, and 40 to 42 of the First Schedule of the Regulations - these provisions set out information that must be in a registered prospectus for shares. The effect of this exemption is that the only information that must appear in the prospectus is:
(i)
main terms of the offer - name of issuer, a brief description of the shares, the number of securities being offered, and the price;
(ii)
name and address of any offeror other than the issuer;
(iii)
details of incorporation of the issuer;
(iv)
all terms of the offer, and of the shares themselves, not otherwise in the prospectus, except those implied by law or set out in some other publicly registered document (in which case the document must be identified); and
(v)
the place where the constitution of the issuer can be inspected.
6.
The exemption is subject to a condition that the securities are allotted only
to eligible persons.
Specified unlisted
issuers
7.
The class exemption also applies to specified unlisted issuers, who can be added to a schedule of the notice. The Commission's policy has been to include unlisted issuers only if they have:
(a)
at least 500 shareholders, holding a minimum of 25% of the total voting shares on issue (equivalent to NZX Listing Rule 5.2.3); and
(b)
an available market for the securities (either on SEATS or some other
equivalent trading system) to facilitate negotiability and liquidity
in the
securities, with an undertaking from the company that the securities would
continue to be traded on such a market.
8.
The exemption for specified unlisted issuers is subject to additional
conditions intended to give potential investors extra information,
and to warn
them that it may not be easy to accurately price, or to deal in, the shares.
There is only one specified unlisted issuer,
New Zealand Wool Services
International Limited.
Individual
exemptions
9.
The Commission has granted 3 individual exemptions for New Zealand companies
who operate employee share purchase schemes but who do
not fit the above
criteria as "specified unlisted issuers".1
10.
These exemptions are similar to the class exemption, in that they allow the
use of an evergreen, short form prospectus. One of these
exemptions also permits
the company to include personalised information in a document accompanying the
investment statement. There
are extra conditions to these exemptions. Each
company must put certain extra information in their annual reports. In addition,
each
company must describe in their investment statement any arrangements under
which shareholders can sell their shares.
1
These exemptions are the Securities Act (Fulton Hogan Limited) Exemption Notice 2000 (SR 2000/164), the Securities Act (Opus International Consultants Limited) Exemption Notice 2002 (SR 2002/80), and the Securities Act (The New Zealand Wine Company Limited) Exemption Notice 2002 (SR 2002/421).
The Commission wishes to extend the ambit of its class exemption so that
smaller companies who wish to use employee share schemes
as part of their
remuneration plan do not have to seek individual exemptions. The Commission
understands that these schemes are relatively
common, but often operate without
a registered prospectus. In some cases, the shares will be offered to people who
are not "members
of the public", and so no prospectus will be needed. However,
under the Securities Act the fact that a person is an employee does
not, of
itself, make that person not a "member of the public" in relation to any offer
of securities by their employer. We think
that most employee share schemes
should have a prospectus and investment statement. The primary purpose of these
documents is to
give information about the benefits, costs, and risks of the
investment to people who may buy shares.
12.
If shares are offered to employees in circumstances where a prospectus is
required there are serious consequences for the employer
(issuer) if the scheme
does not have a prospectus. Under the Securities Act any allotment of shares in
these circumstances is void
and of no effect. The issuer, and any directors of
the issuer, are liable to repay subscriptions. If this is not done within 2
months
of the allotment then the subscriber is also entitled to 10% per annum
interest on their subscription money. For example, if shares
are allotted
without a prospectus and then some years later an employee is unable to sell the
shares, or to get as much as was paid
for them, the employee could claim the
allotment was void, and require the company or its directors to repay the full
subscription
price plus 10% per annum interest. It is important from the point
of view of the issuer's liability to have a prospectus.
13.
Many employee share schemes operate on an ongoing basis. The Commission
recognises that the compliance costs involved in preparing
and registering a
full prospectus every year could be prohibitive for a small
enterprise.
14.
Exemptions for employee share schemes recognise the value of companies
encouraging employee participation in the company through share
ownership plans.
The exemptions strive to strike a balance between lowering compliance costs for
the company and providing employees
with sufficient information to make an
informed decision about joining the scheme.
15.
Taking this as a starting point, there are four policy considerations on which the Commission seeks comment prior to settling any further exemption. These are:
(a)
extent and method of disclosure;
(b)
eligible persons;
(c)
exit mechanisms;
(d)
whether to cap the number of shares that can be allotted under the
exemption.
Extent and method of
disclosure
16.
The Commission considers that registering a prospectus is an important
discipline for any company that intends to issue shares to
the public. However,
once this is done, and the company is an issuer, there are arguments in favour
of limiting the ongoing compliance
costs of renewals. Employee share schemes
tend to operate over a long period of time and there can be significant costs
when prospectuses
must be renewed every year.
17.
For this reason the Commission proposes a class exemption that allows
unlisted companies to offer shares to employees through an established
scheme
using an evergreen prospectus and an investment statement. This is the same
basic level of disclosure as is required of listed
companies under the class
exemption.
18.
The Commission considers that the conditions of any exemption should require
unlisted companies to provide more information than listed
companies are
required to provide. This is because companies listed on NZX have six-monthly
financial reporting obligations, and
must also comply with the continuous
disclosure provisions of the listing rules. This means that shareholders of
listed companies
can easily obtain information about their company, and get an
accurate idea of the value of its shares from the current market price.
Unlisted
companies in general do not offer these advantages.
19.
Compliance costs can be limited if the additional disclosures can be made in
the issuer's financial statements and by additional information
in the annual
report. This avoids the costs of a new disclosure document every year, but still
gives investors the information they
need.
20.
The Commission proposes that unlisted companies using this exemption should provide employees with:
(a)
the company's most recent audited financial statements;
(b)
if any allotment is to be made more than 9 months after the most recent balance date, a set of interim financial statements that comply with FRS-24;
(c)
additional information about the company, shareholdings, and current activities in their annual reports, similar to that already required in the Commission's individual exemptions. This comprises:
(i)
particulars of entries in the directors' interests register; and
(ii)
information about material contracts; and
(iii)
information about any pending legal proceedings or arbitrations that might have a material adverse effect; and
(iv)
a statement by 2 directors of the company as to whether, in their opinion
after due inquiry, there have arisen since the last balance
date any
circumstances that materially adversely affect—
A
trading or profitability; or
B
asset value; or
C
ability to pay liabilities due within the next 12 months.
21.
The Commission does not propose any exemption from the requirement to have an
investment statement. However, given the small amount
of information required in
the prospectus, and the fact that it, like the investment statement, will be an
evergreen document, it
could be sensible for issuers to combine the two
documents. The goal would be to provide concise and clear information for
employees
about the benefits of joining the share scheme, the cost of doing so,
and the risks associated with being a shareholder of the company.
22.
The Commission proposes to require that investment statements for these
offers describe any arrangements the company has in place
for shareholders to
sell their shares, or to facilitate the sale of shares. For more on this, see
the section headed "exit mechanisms",
below.
23.
Because companies may wish to offer individual terms to various employees,
the Commission also proposes that companies using the exemption
could include
personalised information for employees in a document accompanying the investment
statement. The Commission would grant
an exemption from the requirement that the
investment statement set out all the terms of the offer to the extent required
to allow
this.
Questions
a.
Would the proposed exemptions and disclosure conditions relating to the
prospectus and investment statement provide the right balance
between compliance
cost savings and adequate disclosure for employees?
b.
Are any other disclosure exemptions needed to make the exemption more workable?
The Commission proposes that the exemption should apply in respect of shares allotted to people who are "eligible persons" as defined in the existing class exemption. These are people who are:
(a)
employees or directors of the company or any subsidiary; or
(b)
persons who provide personal services (other than as employees) principally
to that company or any subsidiary.
25.
Including people who provide personal services is intended to cover those who
do not have employment agreements, but whose working
relationship with the
company makes them equivalent to an employee. The Commission has not previously
defined at what point a person
provides services "principally" to any given
company. We do not consider it necessary to do so now.
26.
It is not clear whether the class exemption would currently apply to offers
of shares made to employees where the employees will hold
the shares through a
trust arrangement. It is our initial view that the manner in which the employee
wishes to hold shares should
not affect the exemptions available. We propose to
clarify that the exemption will apply where beneficial ownership of the share
is
offered to the eligible person even if the share is allotted to the trustee of a
trust of which the eligible person is either
a beneficiary, either alone or with
family members or with other eligible
persons.
Questions
c.
Is the present definition of "eligible persons" appropriate for an
extended class exemption?
d.
Should the exemption apply where shares are offered to employees, but held through a trust where the employee is a beneficial owner of the shares?
Exemptions for employee share schemes are based largely on an assumption that
employees of a company have a closer relationship with
the company than do other
members of the public. Usually issuers offer shares under such schemes to
enhance employee relations and
as a performance incentive, rather than to
acquire significant capital. Often employees are in a better position to acquire
information
about the company than other members of the public.
28.
However, the Commission has been concerned that shareholders in smaller
companies have only a limited ability to exit their investment,
or to obtain
sufficient information to gauge the appropriate price for their shares should
they wish to sell. The impact of this
can be particularly great for employee
shareholders who depend on the company for most or all of their income. For
these people,
if the company performs badly, both the value of their investment
and the security of their principal income can be adversely affected.
29.
For this reason, the individual exemptions granted to companies whose shares
were not traded on an established market have involved
close scrutiny of
procedures that the companies have in place for investors to sell their shares.
The exemptions have been granted
on conditions that require the employer to
repurchase the shares or to assist employees to find a buyer, at prices that are
either
clearly beneficial to employees or that are set by an independent
valuation.
30.
The Commission considers that any extended class exemption should include a
condition requiring an unlisted company to repurchase
shares from employees who
leave their employment. As the exemption allows limited disclosure because of
the relationship between
employers and employees, we consider the employer
should be obliged to reduce the liquidity risk of the investment by assisting
employees
to exit their shareholdings when they leave the company. Any such
repurchase would need to follow the procedures set out in sections
60 to 62 of
the Companies Act 1993.
31.
The Commission does not consider that the commitment to repurchase shares
should be required where there is an established market
for trading the shares.
However, this option will not be available to most smaller companies.
32.
Accordingly we propose that the new class exemption be subject to a condition that either:
(a)
There is an established market for the shares; or
(b)
The company has offered to repurchase shares under the Companies Act from
employees who are shareholders, when their employment ceases.
33.
Some smaller companies seek to limit the scope of their shareholding, and may
wish to require that shares be repurchased when employment
ceases. The
Commission has no objection to this.
34.
In either case the Commission considers that the investment statement should
clearly describe the options available to employees who
wish to exit their
shareholding, either during their employment or when they leave the
company.
Questions
e.
Should the class exemption be subject to a condition requiring companies
to repurchase shares upon termination of employment?
f.
Is this necessary where there is an established market for the
shares?
g.
Is the proposed disclosure about ability to sell shares sufficient?
The Commission does not intend that exemptions for employee share schemes be
used as avenues for companies to raise significant capital
with only limited
disclosure. Where we have received requests for exemptions to allow companies to
undertake substantial capital
raising from employees the Commission has been
concerned that the interests of the company, in securing significant capital,
might
not be aligned with the long term welfare of its employees.
36.
For this reason the Commission proposes to cap the number of shares that can
be allotted to eligible persons under any class exemption
for unlisted issuers.
As these schemes are likely to operate over long periods it may be appropriate
to have both an annual and an
overall cap.
37.
The Commission proposes that the exemption should be available only
(a)
where the number of shares allotted to eligible persons who are members of the public in any one year does not amount to more than 5% of the share capital of the company at the beginning of the year; and
(b)
where the total number of shares held by eligible persons who are members of the public does not at any time amount to more than 15% of the share capital of the company.
We have chosen the 5% annual limit because this is the percentage of the
share capital of a company that is a substantial holding
in terms of securities
law. The 15% overall cap is sufficiently low, we think, that the exemption is
unlikely to be seen as a preferred
way for a company to raise significant
capital funding.
38.
Directors of many smaller companies have significant shareholdings. The
Commission proposes that the limits described above would
apply only to shares
allotted to and held by eligible persons who must receive a prospectus before
any shares are allotted. It is
not intended that directors' (or some employees')
shareholdings be counted in the total if these people are not "members of the
public",
or are "wealthy or experienced" investors in terms of section 5(2CA) of
the Securities Act.
Questions
h.
Should any class exemption include a cap on the quantity of shares that
can be allotted to eligible persons under the exemption?
i.
If so, are the proposed caps set at the right levels?
The Commission welcomes comments on the questions set out in this paper, and
any other comments on the proposed exemption.
40.
After considering comments received the Commission will decide whether or not
to grant a new class exemption, and the terms and conditions
of the exemption.
An exemption notice will then be drafted. We will send a draft notice for
comment to anyone who would like to be
consulted on the drafting of the
exemption. Please indicate in your comments on this paper if you would like to
be consulted on the
drafting of any exemption notice.
41.
We seek comments before the end of Tuesday 31 August 2004.
42.
Please send comments in electronic format to liam.mason@seccom.govt.nz. Comments can
also be sent by post to: Securities Commission
PO Box
1179
Wellington
Attn: Liam Mason
or by facsimile to (04) 472
8076.
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