Bills Digest no. 6 2009–10
Corporations Amendment (Improving Accountability on
Termination Payments) Bill 2009
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage history
Purpose
Background
Financial implications
Main provisions
Contact officer & copyright details
Passage history
Date
introduced: 24 June
2009
House: House of Representatives
Portfolio: Treasury
Commencement:
The formal provisions
commence on Royal Assent; Parts 1 and 3 of Schedule 1 commence the
day after the Act receives Royal Assent, and Part 2 of Schedule 1
commences immediately thereafter.
Links: The
relevant links to the Bill, Explanatory Memorandum and second
reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
at http://www.comlaw.gov.au/.
The Bill amends the
Corporations Act 2001 (the Act) to give shareholders the
right to veto termination payments (commonly know as golden
handshakes ) made to company directors and senior executives where
the payments are greater than one year of the recipient s base
salary .
The veto will only apply to termination payments made in
relation to retirement from an office or position held under an
agreement (or a condition of an agreement) entered into, varied or
extended on or after the commencement of Part 1 of Schedule 1 to
the Bill (being the day after the proposed Act receives Royal
Assent).
In the last two
years, several high-profile Australian companies, such as Telstra,
Pacific Brands and Qantas, have posted either reduced profits or
significant losses. In some cases, companies have reacted to the
current economic downturn by restructuring their operations,
including retrenching staff. However, often amid the rhetoric of
poor financial performance, the same companies have continued to
pay large salaries to their senior managers. More importantly, for
the purposes of the Bill, they have also sometimes paid large
termination payments, known as golden handshakes , to executives
leaving the company, often at the conclusion of apparently
lucrative employment contracts.
On 18 March 2009, the Treasurer, the then Assistant Treasurer
and the then Minister for Superannuation and Corporate Law issued a
joint media release announcing that the Productivity Commission
would examine the regulation of director and executive remuneration
in Australia.[1] It is not due to report
until 19 December 2009, and is tasked with considering the
following five issues:
- trends in director and executive remuneration, both in
Australia and abroad
- the effectiveness of the existing regulatory framework
- the role of institutional and retail shareholders in setting
and considering remuneration
- ways to better align the interests of boards and executives
with those of shareholders and the community, and
- the effectiveness of the international response to remuneration
issues arising from the global financial crisis, particularly
excessive risk-taking and corporate greed.[2]
Also on 18 March 2009, the Treasurer announced reforms
specifically aimed at termination payments. In a two-pronged
attack, Wayne Swan announced that the Rudd Government is targeting
the amount that an executive may receive as a termination payment,
and is also expanding the ways in which termination payments will
be subject to shareholder approval. Currently (under subsection
200F(3) of the Act) an executive can receive up to seven times his
or her total annual remuneration before shareholder approval of the
termination payment is required, but under the proposed law,
shareholder approval will be required if a termination payment
exceeds one year s average base salary for directors.[3] Shareholder
approval will also be required in relation to payments made not
only to directors but to all executives named in the company s
executive remuneration report. He also explained that the
Government proposed to expand the definition of termination benefit
to catch all types of payments and rewards provided at termination.
Wayne Swan further explained the policy rationale, saying:
Golden handshakes, particularly where a company
has not performed or where workers are being retrenched, are simply
a means of rewarding failure and are absolutely unacceptable. So
today we are sending a very clear message to corporate Australia:
your actions are under scrutiny and the community does expect
better because, as we go through this challenge of the global
recession, we are going to require all the reserves of unity that
we can muster as a nation. We need executives and workers working
together, but to get that trust there has to be basic fairness and
decency in the arrangements that apply to the workforce as well as
to those who employ them.[4]
Under the Act, company shareholders have the right to vote on
certain issues, but depending on the issue, the votes may not be
binding on the company s board of directors. For example, section
250R of the Act deals with the business of an Annual General
Meeting (AGM). Subsection 250R(2) provides that at a listed company
s AGM, a resolution that the remuneration report be adopted must be
put to the vote.[5] However, subsection 250R(3) provides that the
vote on the resolution is advisory only and does not bind the
directors or the company.
In the past year shareholders have voted against 15 of the top
300 companies remuneration reports, but as mentioned above, such
votes are simply advisory only.[6] While both the
Federal Government and the Opposition have at times suggested the
possibility of making such votes binding, John Colvin, CEO of the
Australian Institute of Company Directors (AICD), has expressed
some reservations about giving shareholders greater powers, saying:
One of the things I think is happening is that executive pay
becomes an issue for shareholders disgruntlement and for everybody
s unhappiness at the economic crisis .[7]
Similarly, Peter Anderson, chief executive of the Australian
Chamber of Commerce and Industry, while not dismissing the idea of
binding shareholder votes, was reported as saying that sweeping
regulations could not account for the complexity of different
businesses .[8]
Presumably if the company or its board fails to give proper
consideration to the vote of its shareholders, the shareholders
could take legal action against the company under section 232 of
the Act. Section 232 sets out the grounds for the making of a court
order, including where the conduct of a company s affairs or any
act/omission (proposed or real) by or on behalf of the company is
contrary to the interests of the members as a whole, or is
oppressive to, unfairly prejudicial to, or unfairly discriminatory
against, a member or members whether in that capacity or in any
other capacity .
Additionally, under section 249D of the Act, the directors of a
company must call and arrange to hold a general meeting on
the request of either (a) members who hold at least 5 per cent of
the votes that may be cast at the general meeting or (b) at least
100 members who are entitled to vote at the general meeting. The
request must be in writing and state any resolution to be proposed
at the meeting. It must be signed by the members making the request
and be given to the company. The directors must call the meeting
within 21 days after the request is given to the company, and the
meeting is to be held not later than 2 months after the request is
given to the company.
Similarly, members who hold at least five per cent of voting
rights may call and arrange to hold (at their own expense) a
general meeting under section 249F of the Act.
Either of these procedures could be used by members to protest
against any perceived mismanagement of the company by sacking or
refusing to re-elect directors.[9]
Finally, if shareholders (as owners of the company, as opposed
to management of the company) feel that the directors do not accord
their wishes (expressed by voting) due and proper weight, then
shareholders can sell their shares and otherwise withdraw support
for the company.
Currently, section 200B of the Act provides that a company, an
associate of the company or a prescribed superannuation fund in
relation to the company must not give a person a benefit in
connection with that person s, or someone else s, retirement from a
board or managerial office in a company, or a related body
corporate, without member approval under section 200E of the
Act.
Section 200E provides that the approval must be given by a
resolution passed at a general meeting of the company and any
domestic holding company of the company (whether listed or not).
Details of the benefit must be set out in the notice of the
meeting, including the amount of the payment (or the manner in
which the amount is to be calculated) or the money value of the
proposed prescribed benefit (or how that value is to be
calculated).
If the payment is not to be made to the retiree but to a related
party, then paragraph 211(3)(b) provides that member (shareholder)
approval of a financial benefit given to a person because of
retirement is not required where the financial benefit is
reasonable . Section 213 provides that member approval is not
needed to give a financial benefit to a related party in a
financial year if the total of the amounts or values is less than
or equal to the amount prescribed by the regulations for the
purposes of the section. Currently, that amount is $5000.[10]
Section 300A sets out the specific information that is to be
provided by listed companies (ie companies listed on the Stock
Exchange) in their annual directors reports. Paragraph 300A(1)(c)
provides that an annual directors report must contain the
prescribed details in relation to the remuneration of (emphasis
added):
- if consolidated financial statements are required--each member
of the key management personnel for the consolidated entity;
and
- if consolidated financial statements are not required--each
member of the key management personnel for the company; and
- if consolidated financial statements are required--each of the
5 named relevant group executives who receive the highest
remuneration for that year; and
- in any case--each of the 5 named company executives who
receive the highest remuneration for that year; and
Sub-paragraph 300A(1)(e)(vii) states that for each person
referred to in paragraph (c), the annual report must include ( in a
separate and clearly identified section of the report ) (emphasis
added):
- if the person is employed by the company under a contract--the
duration of the contract, the periods of notice required to
terminate the contract and the termination payments
provided for under the contract; and
While it is possible that details about a golden handshake
payment for a company executive may be set out in the person
s employment contract, such details may not necessarily be included
in the company s annual remuneration report. It would depend on
whether payment is in fact a termination payment , or if (for
example) it is the case that, the contract having run its normal
course, the person simply receives an ex gratia type
payment that is not provided for in the contract.
The terms of the contract itself would presumably not be subject
to shareholder scrutiny although if the person is one of the 5
named company executives who receive the highest remuneration for
that year , at least the existence of the contract and some
financial details would be flagged every year in the annual
remuneration report.
Assuming that information about a golden handshake payment
is actually included in a remuneration report,
then regardless of how much detail is made available to
shareholders, it remains the fact (as stated above) that a
shareholder vote on a remuneration report is not binding on the
company or its directors. Any vote on a remuneration report is
advisory only, with any Board refusing to accept the vote (and its
consequences) doing so, presumably, at its discretion and/or
peril.
As mentioned above, and as discussed in detail in the
Main provisions section below, shareholder
approval is only needed before certain termination payments can be
made. While retirement benefits generally need shareholder approval
under section 200B of the Act, that provision does not apply in a
number of circumstances (see below), including where the payment is
less than certain amounts that are currently defined by relation to
the retiree s length of service in the office and his or her total
remuneration. The Bill revises the circumstances where shareholder
approval is not required.
On 25 June 2009, the Bill was referred to the Senate Economics
Legislation Committee for inquiry and report by 7 August 2009.
However, on 27 July 2009, the inquiry presented its interim report
to the President of the Senate, saying that it needed more time to
finalise its final report, which is expected to be ready by 7
September 2009.[11] Details of the inquiry are at
http://www.aph.gov.au/Senate/committee/economics_ctte/termintation_payments_09/info.htm,
viewed 22 July 2009. The Committee received 15 submissions, the
content of which is summarised in the next section of this
Digest.[12]
Some commentators have suggested that the Government should
leave shareholders to set appropriate limits on termination
payments, rather than intervening to set limits in the legislation.
They say that there are factors in play that companies need to take
into account such as the need to attract top talent from overseas
as well as competing for that talent in the local market .[13]
Other commentators have suggested that the Government should
await the report from the Productivity Commission before
introducing legislation on matters which are the subject of the
Commission s inquiry.[14] Michael Robinson, Director of Guerdon
Associates, an independent executive remuneration and performance
management consulting firm, suggested that there is a risk that
changes in tax and law before the Productivity Commission reports
in December will undermine the potential benefits of its review
.[15] Specifically on the issue of whether the
threshold for shareholder approval of termination payments should
be lowered, Robinson indicated (in the context of recruiting
executives from overseas) that companies are likely to increase
fixed pay to compensate for the fact that termination pay will be
lower than the levels considered acceptable in the [prospective
executive s] home country, and the risk is higher .[16] Such
comments presuppose the likelihood that shareholders would consider
proposed termination payments that would otherwise require their
approval to be unreasonable and not in the interests of the
company.
In submissions made to the Senate Economics Legislation
Committee on the current Bill, several entities suggested the one
year base salary threshold (over which shareholder approval of a
proposed termination payment is required) is too low and out of
step with the position in comparable jurisdictions (such as the UK,
Canada and the USA).[17] Guerdon Associates suggested it should be set
at three time base salary plus bonus (using an average based on the
previous three years experience) ,[18] whereas the Australian
Compliance Institute suggested a two year base.[19]
The submission from Origin Energy identified three possible
unintended consequences of the reform: imposing additional costs to
compete; downward pressure on established redundancy protection for
all employees; and increasing fixed costs.[20]
According to the Explanatory Memorandum, the Bill has no
significant impact on Commonwealth resources.[21]
Items 1 6 of Part 1 of Schedule 1 amend the
dictionary in section 9 of the Act, mainly to define terms by
reference to new provisions contained in the Bill. For example,
item 1 inserts the new term base salary
and defines it as having the meaning specified in regulations made
for the purposes of this definition . Notably, in the exposure
draft of the Bill released for public comment on 5 May 2009, the
term was defined as having the meaning generally accepted within
the accounting profession .[22] The definition found in the
current version of the Bill is thus more specific than the
definition in the exposure draft, but it would be more
user-friendly to define the term in the Act itself.[23]
According to the Minister s second reading speech, the regulations
will be made following further targeted consultation .[24]
Item 7 inserts proposed sections 200,
200AA and 200AB into the Act. Proposed section
200 states that in determining whether a benefit
is given (for the purposes of Division 2 of Part 2D.2 of the Act),
a wide interpretation of that term is to be used (even if criminal
or civil penalties may be involved), and economic and commercial
substance is to prevail over the form of the conduct
involved.[25]
Proposed section 200AA sets out when a person
holds a managerial or executive office . Primarily, for a
company to which section 300A applies for the previous
financial year, a person holds such an office in a company during
the current financial year if his or her details were included in
the directors report for the previous financial
year.[26] The person is taken to hold the office for the
whole of the current financial year, unless and until the person
retires from an office or position in the company before the end of
that year.[27] If section 300A does not apply to the company
(because it is not a listed company), a managerial or executive
office for the body corporate is defined as an office of
director or any other office or management position that is held by
a person who also holds an office of director of the body corporate
or a related body corporate.
Proposed section 200AB defines the term
benefit for the purposes of Division 2 of Part 2D.2
of the Act. It includes:
- a payment or other valuable consideration
- any kind of real or personal property
- any legal or equitable estate or interest in real or personal
property
- any legal or equitable right, and
- anything specified in regulations made for the purposes of this
definition.
However, under proposed subsection 200AB(2),
the term benefit does not include anything
specified in regulations made for the purposes of this subsection.
Thus, regulations made for the purposes of proposed section
200AB may define both what is, and what is not, a
benefit .
Items 8 11 amend existing section 200A, mainly
as a consequence of amendments contained elsewhere in the Bill.
Section 200A sets out when a benefit is given in connection with
retirement from an office.
Items 12 14 amend existing section 200B, which
provides that retirement benefits generally need membership (or
shareholder) approval. Under the amendments, shareholder approval
will no longer be required under section 200E before a person
receives a benefit in connection with that person s (or another
person s) retirement from a company s board. If the
amendments are passed, then shareholder approval will only be
required if a person is to receive a benefit in connection with the
person s (or another person s) retirement from a managerial or
executive office in the company (or if the retiree held such a
position during the last three years).[28]
Items 14 18 make minor, consequential
amendments to existing sections 200B and 200C.
Items 19 25 amend section 200E in relation to
member approval of termination payments. Item 19
repeals existing subsection 200E(1) and inserts proposed
subsections 200E(1), (1A) and (1B),
setting out the conditions that must be satisfied for the purposes
of sections 200B and 200C.[29] These conditions are as follows:
- that the giving of the benefit needs to be approved by a
resolution passed at a general meeting of the company,[30]
and
- that the details of the proposed benefit must be set out in, or
accompany, the notice of the meeting at which the resolution will
be considered.[31]
For the purposes of section 200B (shareholder approval of
retirement benefits generally), an additional condition must also
be satisfied:
- that at the general meeting, a vote must not be cast (in
any capacity) by or on behalf of the retiree or an associate of the
retiree.[32]
Proposed subsection 200E(2C) (item
22) states that the regulations may prescribe cases where
proposed subsection 200E(2A) does not apply.
Items 25 32 amend section 200F of the Act,
which deals with benefits to which section 200B does not
apply. Largely the amendments are consequential upon other
amendments contained in Schedule 1, however, item
31 repeals existing subsections 200F(3) and (4) and
inserts new provisions in their place. Section 200B does not apply
if the value of a proposed benefit, when added to the value of any
other payments made in connection with the person s retirement from
a relevant office or position, is lower than the amount worked out
using the formulae in subsections 200F(3) and (4),
whichever formula is applicable. Proposed subsection
200F(3) sets out the formula that must be used if the
person held the position or office for less than a year
(continuously or throughout a number of periods), and
proposed subsection 200F(4) sets out the formula
that must be used if the person held the position or office for
more than one year.
The main difference between existing subsection 200F(3) and
proposed subsection 200F(3) is that the formula in
the existing provision is based on the retiree s total
remuneration, whereas the formula in the proposed subsection is
based on the person s estimated base annual salary . That
term is defined in the subsection to mean a reasonable estimate of
the base salary that the person would have received from the
company and related bodies corporate during the relevant period if
the period had been one year .
As mentioned immediately above, proposed subsection
200F(4) sets out the amount that applies if the person
held the position or office for one year or more. The amount varies
slightly, depending on the length of time the person held the
office, however, it is essentially the person s average annual base
salary. If the person held the office or position for three years
or more, then the relevant amount is the person s average annual
salary for the last three years of the period.
The practical effect of proposed subsections 200F(3) and
(4) is that membership approval is not needed for a
retirement benefit if the value or the benefit, when added to the
value of all other benefits already made or payable in connection
with the person s retirement does not exceed the person s annual
base salary (or the relevant proportion thereof if the person held
the office or position for less than one year). Where a person had
held the office or position for more than three years, the revised
formula in proposed subsection 200F(4)
significantly reduces the threshold at which member approval of a
termination payment is required.
Items 33 39 amend section 300G of the Act,
which provides that shareholder approval is not required for a
payment made in connection with a person s retirement from an
office or position where the payment is for past services rendered
to the company or related body corporate by the person, provided
the value of the payment does not exceed the amount worked out
under proposed subsection 200G(2) or (3),
whichever is applicable. Proposed subsection
200G(2) applies if the person held the office or position
for less than one year, and proposed subsection
200G(3) applies in all other cases. The content of these
provisions is the same as that in proposed subsections
200F(3) and (4). That is, where a person received a
termination payment for past services, member approval is not
required where the person held the position for less than one year
and the amount received is less than the relevant proportion of the
person s estimated annual base salary. Where the person held the
position for more than one year, the amount is worked out using the
person s annual base salary (or an average annual base salary where
the person worked for more than one year, limited to the last three
years where the person held the position or office for three years
or more).
Item 40 repeals existing subsection 200J(1) and
replaces it with proposed subsections 200J(1) and
(1A). Section 200J currently provides that if giving a
benefit to a person contravenes section 200B, then the amount of
the payment, or the money value of the prescribed benefit is taken
to be received by the person in trust for the company. If the
amendments are passed, then the amount of the benefit, or the money
value of the benefit, is taken to be received by the recipient on
trust for the giver and must be immediately repaid. Under
proposed subsection 200J(1A), any amount repayable
under proposed subsection 200J(1) is a debt due to
the giver and may be recovered in a court of competent
jurisdiction.
Item 41 amends items 25, 26 and 27 in the table
in Schedule 3 to the Act.[33] The amendment increases the penalty for
breaches of subsections 200B(1) and 200C(1) and section 200D from
25 penalty units to 180 penalty units. As a penalty unit is
$110,[34] the amendment increases the maximum possible
fine from $2750 to $19 800. Such fine can be imposed on its
own or in combination with a (maximum) term of six months
imprisonment. As the Explanatory Memorandum for the Bill explains,
the increase is intended to reflect the seriousness of giving a
termination benefit where it has not been approved by shareholders
in accordance with the Act, and to provide a sufficient deterrent
to such benefits .[35] Obviously the deterrent effect will depend
upon the quantum of the termination payment and the resources of
the company or body corporate involved.
The Explanatory Memorandum also refers to an increase in the
penalty units applicable to a body corporate for breach of sections
200B, 200C and 200D from 150 penalty units to 900 penalty units.
While such an increase is not mentioned in the Bill, subsection
4B(3) of the Crimes Act 1914 states that where a body
corporate is convicted of an offence against a law of the
Commonwealth, the court may, if the contrary intention does not
appear and the court thinks fit, impose a pecuniary penalty not
exceeding an amount equal to 5 times the amount of the maximum
pecuniary penalty that could be imposed by the court on a natural
person convicted of the same offence . While five times the
proposed penalty is 900 penalty units, five times the current
penalty is only 125 and not the 150 penalty units mentioned in the
Explanatory Memorandum as applying to body corporates.[36]
All of the amendments in Part 1 commence the
day after the proposed Act receives Royal Assent.
Item 42 amends paragraph 200F(1)(a), with
effect immediately after the commencement of Part 1. Paragraph
200F(1)(a) currently provides an exception to the requirement that
a proposed termination payment must receive shareholder approval,
and applies where the benefit is given under an agreement entered
into before 1 January 1991 or is a payment made in respect of leave
of absence to which the person is entitled under an industrial
instrument. Under the proposed amendment, paragraph 200F(1)(a) will
refer only to a benefit payable in respect of leave of absence to
which the person is entitled under an industrial instrument.
Given the short space of time between the commencement of Part 1
and the commencement of Part 2, it is not clear why this amendment
was not made in Part 1, particularly when under sub-item
43(3), paragraph 200F(1)(a) will continue to apply, in
relation to agreements entered into before 1 January 1991, as if
the amendment in item 42 had not been made. The
Explanatory Memorandum offers no assistance on this point.
Sub-item 43(1) provides that the amendments
made by Part 1 apply in relation to a retirement from an office or
position held under an agreement (or a condition of an agreement)
entered into, varied or extended on or after the commencement of
Part 1 (being the day after the proposed Act receives Royal
Assent). Similarly, sub-item 43(2) provides that
if the amendments in Part 1 apply to the a person s retirement from
the holding of an office or position of employment, the relevant
period for the purposes of section 200F or 200G applies to offices
or positions held before the commencement of Part 1.
Members, Senators and Parliamentary staff can obtain further
information from the Parliamentary Library on (02) 6277 2795.
Morag Donaldson
5 August 2009
Bills Digest Service
Parliamentary Library
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