In this case, the Full Court of the Federal Court of Australia affirmed a broad interpretation of when a benefit will be made “in connection with” a person’s retirement from office for the purposes of section 200A of the Corporations Act 2001 (Cth).  The Court stated that Parliament intended to create a broad nexus between the benefit concerned and the cessation of the person’s relationship with the company to enable it to protect the rights and interests of shareholders to know and approve the expenditure of a company’s money.  Executives are reminded of the importance of ensuring that where their termination benefits may not fall squarely within a statutory exception to section 200B, shareholder approval has been obtained (ideally promptly after their appointment) to reduce the risk of subsequently being required to repay them. 

This case was an appeal from a decision of the Federal Court in Queensland Mining Corporation Ltd v Renshaw [2014] FCA 365 (see the CA Update - May 2014 for a summary of the Federal Court decision). 

Mr Renshaw was managing director of Queensland Mining Corporation Limited (QMCL) and both he (and his controlled entity Butmall Pty Ltd) were parties to a Services Agreement with QMCL (Services Agreement). Prior to the expiry of the Services Agreement, Mr Renshaw resigned in accordance with a Settlement Deed (Settlement Deed) which provided that:

QMCL terminates the Services Agreement and agrees to pay a “termination sum” upon signing of the Settlement Deed (clause 1.1);

Renshaw agrees to resign as managing director of QMCL upon receipt of the termination sum (clause 2.1); and

QMCL further agrees to pay Renshaw a “termination benefit” of 2 million QMCL shares in QMCL (or $110,000 if the shares were not issued by a certain date) (clause 2.2).

Perry J in the Federal Court found that each of the payments under the Settlement Deed constituted a “benefit” made “in connection with” the termination of Mr Renshaw’s employment as managing director of QMCL for the purposes of section 200A of the Corporations Act 2001 (Cth) (Act) and were thus made in breach of section 200B without shareholder approval.  On appeal, Mr Renshaw argued that clause 2.2 alone related to Mr Renhaw’s loss of office and the “termination sum” in clause 1.1 simply involved the payment of compensation for QMCL’s early termination of the Services Agreement and was not “in connection with” Mr Renshaw’s resignation.

Rares, Griffiths and Gleeson JJ in the Full Court of the Federal Court of Australia rejected this argument holding that:

the purpose of Division 2 of Part 2D.2 of the Act is to “bring transparency to, and shine daylight onto, transactions commonly called “golden handshakes””.  Parliament intended to create a broad nexus between the benefit concerned and the cessation of the person’s relationship with the company to enable it to protect the rights and interests of shareholders to know and approve, the expenditure of a company’s money.  Accordingly, the context of Division 2 informs and suggests a broad construction of the reach of the expression “in connection with”;

clause 1.1 of the Settlement Deed expressly made termination of the Services Agreement and payment of the termination sum conditional upon the signing of the Settlement Deed and clause 2.1 recorded Mr Renshaw’s agreement to resign as managing director upon receipt of the termination sum.  In other words, both termination of the Services Agreement and Mr Renshaw’s resignation depended on the payment of the termination sum; and

the commercial substance of the conduct that occurred in the signing of the Settlement Deed, the payments and receipts of the termination sum and Mr Renshaw’s simultaneous resignation, as provided in the Settlement Deed, established a sufficient connection between all those events.