Alert

Who does this affect?

All corporations, directors, executives, remuneration committee members and their advisers.

What do you need to do?

Consider the implications of the new laws for executive employment contracts and remuneration arrangements.

Author
Andrew Gray  
Partner

---

Andrew Gray  
Partner
T +61 2 9296 2404

---

Murray Kellock  
Partner
T +61 3 9643 4172

---

Sydney
Tim Bednall  
Brian Murphy  

Melbourne
Alison Lansley  
Diana Nicholson  

Perth
Nigel Hunt  
Robert Lilburne  

---

The Government has introduced its new laws regulating executive termination payments into Parliament. The Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 (Bill) retains the key changes proposed in the Exposure Draft of the Bill released in May 2009 but does contain some important differences.

Changes in the Bill

The key changes proposed by the Government are summarised in our previous alert regarding the Exposure Draft. The key aspects of these remain the same in the Bill.

One important feature of the Bill is that it will be accompanied by regulations which will provide further “guidance” and “clarity” on the provisions of the Bill. These regulations have not been finalised and they could have a significant impact on the operation of the proposed laws.

The Government did not release a further draft of the Regulations today. We understand that Treasury intends to engage in further consultation regarding the content of the Regulations before the Bill receives royal assent. At this stage, it is expected that the Bill will not receive royal assent until Parliament resumes in August.

The main differences between the Bill and the Exposure Draft are as follows:

Approval requirements

Under the Exposure Draft shareholder approval for termination benefits could only be obtained:

• after the retiree had retired from a “managerial or executive office”; and

• a shareholders’ meeting could not be called for the sole or dominant purpose of approving the benefits.

These requirements are not included in the Bill. The Bill largely retains the current rules in s 200E of the Corporations Act except that it introduces new rules precluding the retiree from participating in the shareholders’ vote (other than in limited circumstances).

The meaning of base salary

The Exposure Draft provided that “base salary” for the purposes of determining the retirement benefits cap had “the meaning generally accepted within the accounting profession”. The Bill provides that “base salary” for the purposes of the Bill will be specified in the Regulations.

Unless the Regulations define “base salary” broadly, the cap could be potentially quite low for executive employees whose remuneration comprises significant “at risk” or variable components rather than fixed remuneration.

Clarity around which benefits require approval

The Explanatory Memorandum to the Bill (EM) indicates that the Regulations will provide guidance and certainty by providing specific examples of benefits which do or do not require shareholder approval.

The EM provides a number of examples which largely reflect the benefits identified in the draft Regulation previously released by the Government (see our previous alert) except that they suggest that superannuation contributions based on salary sacrifice amounts will be excluded from benefits which require approval. The EM retains the following key points addressed in the draft Regulations released previously, namely:

• clarification that “automatic or accelerated vesting of options” and “payments in lieu of notice of termination” of employment can be retirement benefits;

• deferred bonuses will not require approval. However, the EM does not provide any further guidance on what is meant by this concept.

Effective date of the changes

The Exposure Draft provided that the new laws would only apply to retirements from a “managerial or executive office” under an agreement entered into or extended after the commencement of the new laws. The Bill extends this so that the new laws will apply to the retirement from an “managerial or executive office” held under:

• an agreement entered into; or

• an agreement renewed or extended; or

• an agreement, for which a variation of a condition of the agreement happens,

on or after the commencement of the new laws.

The new third condition is likely to cause uncertainty as to whether the new laws apply to an executive. The EM indicates that minor changes to an existing contract “will not be considered a variation of a condition. However, changes which effect an essential term, including any term relating to remuneration would be considered a variation of a condition”.

Unresolved issues

While the Bill contains several improvements to the Exposure Draft, it continues to present a number of issues of concern:

• Linking the benefit cap to “base salary” rather than total remuneration could result in an unfair outcome for many executives.

• There are deficiencies in the way in which the Bill deals with the treatment of superannuation benefits.

• The Bill continues to provide a look back period to include persons who held an “executive and managerial office” within 3 years of their retirement whether or not they hold such office at the time of their retirement.

• The Bill applies to benefits provided to directors of private companies, including directors of subsidiaries of a listed company, whether or not the employee is named in the listed company’s remuneration report. For large listed companies with many subsidiaries this is an undesirable outcome. While the current laws also operate in this way the reduction in the benefits cap makes the requirement to obtain approval more likely.

• There continues to be an issue as to whether the exemption to shareholder approval in s 200G of the Corporations Act is capable of applying to: a) the vesting of shares or options as s 200G only applies to “payments”; and b) a payment in lieu of notice of termination - it is not clear that a payment in lieu of notice of termination can be described as a payment for “past services” which is a pre-condition to the exemption in s 200G.

Implications

We think the Bill will have the following immediate implications:

• Negotiations regarding the terms of employment for executive employees or other unresolved terms should be finalised and documented prior to the commencement of the new laws to avoid unintended consequences for executives.

• The application of the new laws where there is a “variation to a condition of a contract” will have real implications for companies looking to implement changes to executive terms or remuneration packages in the future - for instance, an increase in remuneration may result in an executive being covered by the laws unless their contract is drafted so that a remuneration increase does not constitute a variation to their contract (executive contracts should be amended to provide for this).

• There will most probably be an increase in companies seeking to obtain shareholder approval “up front” for benefits which might be caught by the new laws. Listed companies will need to pay careful attention to the resolutions proposed at an AGM or EGM to approve share/option schemes to ensure that the approval is effective to cover all benefits which may require shareholder approval under these laws.

The new laws present significant issues which will need to be considered when entering into or varying executive employment contracts and developing executive remuneration packages. It is also clear that the impact of these laws will be influenced by regulations which are still being finalised by the Government.

Our executive remuneration and governance teams would be pleased to assist you in understanding these significant changes.