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DISCLOSURE BY FINANCE COMPANIES

Eligible persons

24.

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?

Exit mechanisms

27.

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?

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