Waiting for ASIC

As most of you are painfully aware, in late 2012/early 2013, the Australian Securities and Investment Commission (ASIC) concluded that restricted stock units (RSUs) should no longer be considered as nil-priced stock options, with the effect that most exemptions from the prospectus disclosure requirement no longer were available for RSUs. This meant that, in most cases, the grant of RSUs to employees in Australia would trigger a prospectus filing obligation, which would be extremely onerous for companies.

While one can debate whether ASIC was wrong in coming to this conclusion, it is clear that ASIC is standing by its decision. It demonstrated as much by publishing a consultation paper in November 2013, under which it proposed to issue a new Class Order exemption which would expressly cover RSUs.

The new Class Order is supposed to replace the existing Class Order exemption (which many companies rely on for the grant of options and the offering of their ESPPs). ASIC initially announced that the new Class Order would be issued in May/June 2014. As you no doubt have noticed, the new Class Order has still not been issued, and ASIC just informed our colleagues in Sydney that it should not be expected any earlier than the third quarter of 2014.

So, what to do while we are waiting for ASIC?

• If your company has applied for and obtained specific relief from ASIC for the grant of RSUs, the delay is not important and will not impact your grants. You may continue to grant RSUs in reliance on the specific relief. Once issued, the new Class Order likely will provide for transitional rules which will determine how long companies can continue to rely on the specific relief and when they will need to start complying with the conditions of the new Class Order. However, given that the conditions of the specific reliefs granted by ASIC generally are modeled on the conditions of the proposed Class Order (as set forth in the 2013 ASIC consultation paper), it is unlikely that major changes will be necessary. Of course, to be certain, we will need to wait for the new Class Order to be finalized.

• If your company has been holding off on granting RSUs or has continued to grant RSUs without obtaining specific relief, the delay is obviously annoying. If you have been holding off on granting RSUs, you will probably want to continue doing so and will need to adjust expectations accordingly. Beware that there is no guarantee that ASIC will actually issue the new Class Order in Q3 2014. If you are not willing to play the waiting game (but also not willing to incur any risk), you could still apply for specific relief which is now routinely granted within a matter of 4-6 weeks.

• For those companies that have continued to grant RSUs (or are tired of waiting and want to grant now), the grants arguably are in violation of the Australian Corporations Act because they are made without a prospectus. Technically, ASIC can apply penalties up to approx. US$100,000 as well as criminal penalties in case of such a violation. However, to our knowledge, ASIC has never applied penalties to companies offering shares in the context of an employee share plan. Our Sydney office thinks ASIC also is very unlikely to apply penalties to companies that grant RSUs (without specific relief or another exemption), especially in light of the fact that the new Class Order will cover RSUs which demonstrates ASIC’s intent not to require a prospectus for such grants. Therefore, practically speaking, the risk of making RSU grants is very low.

Staying compliant

Still, for companies with very strict compliance standards, this may not be sufficient and the wait will have to continue. Alternatively, companies could consider granting another type of award until the new Class Order is issued. Options are not a great alternative because, even though an exemption from the prospectus requirement will probably be available, the tax treatment of options in Australia continues to be undesirable (generally taxed at vesting).

By contrast, restricted stock awards (RSAs) could be a viable alternative, because the existing securities exemptions apply to RSAs (such as the current Class Order exemption or the “20-in-12” exemption) and RSAs are taxed “only” at vesting when the restrictions on the shares lapse. Most companies do not grant RSAs outside the U.S. (or even in the U.S.), given that the tax treatment of RSAs often is undesirable (taxed at grant in many countries) and that RSAs can be administratively more burdensome because shares have to be issued at grant and held in escrow until vesting. Still, for those of you that are desperate to grant a full value award in Australia now, but not willing to compromise on the securities law compliance, RSAs may be the answer.

Meanwhile, we are all crossing our fingers that the new Class Order will indeed be issued by October 2014 and not face additional delays!