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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