The Financial Markets Conduct Act exemption for employee share schemes comes into force on 1 April 2014. This is a watershed event for the New Zealand tech sector – finally tech companies can offer shares and options to New Zealand employees on a similar basis to those offered to Silicon Valley employees.

We expect there will be a rush of tech companies setting up new schemes from 1 April. We’ve been advising clients to hold off setting up schemes until the new exemption is available, and are aware of a lot of pent up demand for cost effective schemes in the sector.

To qualify for the new exemption, companies will need to meet the following requirements:

• the offer must be made as part of the employee’s remuneration, or in connection with their employment or engagement
• raising funds must not be the primary purpose of the offer
• the company must limit the number of shares and/or options issued under the scheme in any 12 month period to 10% of the total number of shares on issue.

Companies also must provide a limited disclosure package to each employee containing:

• a description of the scheme and its terms and conditions
• the company’s latest annual financial statements and latest annual report, with a statement that (if applicable) the financial statements are not audited.  Alternatively, the company may state that participating employees have a right to receive those documents free of charge from the company
• a warning statement, to the effect that the normal disclosure obligations do not apply to the employee share scheme, and participating employees will have fewer legal protections for their investment.

These disclosure obligations, including the specific form of the warning that must be provided, are contained in the Financial Markets Conduct (Phase 1) Regulations 2014.

We expect that most companies will include these disclosures in the offer document for the scheme, i.e. the disclosures will be part of the terms of the offer. This seems the most straight-forward way of meeting the disclosure requirements.

Although the above requirements should be easy to comply with, companies will need to think about a number of other issues before setting up a scheme, including:

• the terms of each scheme need to be tailored to the circumstances of the company and the incentives that the scheme is intended to create for the company. E.g., over what time period will shares/options vest with the employee so that they can retain the benefit of the shares/options after they leave the company? Will there be a distinction between good leavers and bad leavers?
• companies need to review their governance documentation (shareholders’ agreements and constitutions) to make sure they are appropriate for the inclusion of small shareholders on the share register.  This is as important for share option schemes as it is for share purchase schemes, because the peculiar tax treatment of capital gains in New Zealand means employees often exercise share options in advance of a liquidity event (which is uncommon in Silicon Valley)
• it is important to obtain expert tax advice to ensure the tax consequences of the scheme are understood. However, the tax treatment of different types of scheme needs to be balanced against the complexity involved.

Keep an eye on our website as we will shortly be publishing for New Zealand tech companies a template set of documentation for the issue of share options to employees under the exemption. We’ll post this ahead of 1 April.