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PROPOSED EXEMPTION FOR EMPLOYEE SHARE PURCHASE SCHEMES OF UNLISTED COMPANIES

Introduction

1.

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section 37A(2) of the Securities Act (now redundant, as section 37A(2) was repealed in April 2004);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.

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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).