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Andrew Gray
Partner
Murray Kellock
Partner
Andrew Gray
Partner
T +61 2 9296 2404
Murray Kellock
Partner
T +61 3 9643 4172
Sydney
Tim Bednall
Andrew Gray
Brian Murphy
Melbourne
Alison Lansley
Diana Nicholson
Perth
Nigel Hunt
Robert Lilburne
Canberra
Ian Johnson
The Government has now released a draft of its new laws regulating executive termination payments. Under these new laws, termination benefits for directors and certain senior executive employees exceeding one year’s average base salary will require shareholder approval.
The exposure draft of the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 was released by the Government this morning for public consultation during a 4 week exposure period ending 2 June 2009. The Government proposes that the Bill will be introduced into Parliament during its winter sittings (we anticipate this will occur in mid to late June).
The key changes proposed by the Bill are as follows.
Extended coverage
Extending the present laws so they apply to persons holding a “managerial or executive office” with a company. This will include:
- persons named in the companies’ remuneration report for listed companies; and
- persons who are directors of non-listed companies.
The provisions also apply where the retiree has at any time in the previous three years held a “managerial or executive office” in a company or a related body corporate. For groups with significant numbers of subsidiaries, this may expand the operation of these provisions considerably.
Lower cap on termination benefits
Capping the termination benefits which can be provided to a person holding a “managerial or executive office” without shareholder approval at an amount of one year’s average annual base salary. The Bill provides rules for determining this amount for employees who have completed part years of service. For employees with more than three years service, the average annual salary is determined by their average annual salary over the last three years.
Extension of benefits covered by the cap
The definition of termination benefit which requires approval has been expanded to close perceived “loop holes” in the current law. The draft Regulations proposed with the Bill make it clear that the following benefits are considered to be termination benefits:
- any kind of pension;
- any payment made in lieu of notice of termination of employment;
- any amount paid as a voluntary out of court settlement;
- superannuation contributions in excess of the minimum statutory requirement; and
- options which automatically vest or the accelerated vesting of options on retirement from the office.
The Government has also foreshadowed that the Regulations will be used in the future to detail new payment methods/benefits as benefits which may require shareholder approval.
On the other hand, the draft Regulations exclude:
- payment of deferred bonuses, i.e., bonuses that have been earned but not yet paid to the director or executive. How this applies where bonuses are held in vested securities or, for example, remain subject to forfeiture conditions, will need to be worked through; and
- payments from a defined benefit superannuation scheme in existence before the Regulations commenced.
Benefits paid in respect of leave of absence which an executive or director is entitled to under a contract of employment, law or other industrial instrument are also excluded.
Shareholder voting arrangements
Any vote of shareholders required to approve the termination benefits must be held after the director or executive has departed the company and the shareholders meeting must not have been called for the sole or dominant purpose of passing the approval resolution. It must be questionable whether putting a resolution to approve a benefit months after the event is practicable for the company or the retiree.
Repayment of unauthorised benefits
Any unauthorised termination benefits must be repaid immediately by the director or executive to the company.
Higher penalties
Increased penalties for a breach of legislative requirements. The penalties have been increased to $19,800 (up from $2,750) for individuals, and $99,000 (up from $16,500) for corporations. The proposed laws retain the existing option of up to six months imprisonment.
No retrospective operation
The laws are not intended to have retrospective operation. Significantly, the new laws will only apply in relation to resignations of officers, or positions of employment, held under agreements entered into, or extended, on or after the commencement of the new laws. Issues are likely to arise as to whether/when a variation of an existing contract creates a new contract.
Conclusion
These proposed new laws will have significant implications for the remuneration arrangements and termination entitlements of directors and senior executives of listed companies (including the incentive arrangement typically utilised for senior executive employees). Interested parties should consider making submissions on the draft legislation prior to the deadline of Tuesday 2 June 2009. We have flagged a couple of issues that immediately come to mind above and will be considering those and other issues further. Please contact one of the partners named in this alert if you would like to discuss the making of any submissions.
Click here to view the exposure draft.
Click here to view the explanatory memorandum.