Most corporate counsel and company secretaries would now be aware of the commencement of the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 (the Act), particularly because of the significant attention attracted by the new 'two strikes' rule. The following is a brief summary of this new rule, as well as other important reforms in the amending legislation that will affect all listed companies.
'Two strikes' rule
The focal point of this reform is the 'two strikes rule', which empowers shareholders in listed companies to cause a 'spill' of the board of directors if the remuneration report is not supported at two consecutive annual general meetings (AGMs). This is a significant development, and one that has been several years in the making, as it now gives weight to what was previously only an advisory vote of shareholders in relation to companies' executive remuneration practices and policies.
Under the new rule, if 25 per cent or more of eligible votes cast at two consecutive AGMs (ie 'two strikes') are against the remuneration report, a 'spill resolution' must be put to shareholders at the second AGM. Then, if 50 per cent or more of eligible votes are cast in favour of a board spill, the company will be required to re-convene another meeting within 90 days for an election of directors. A spill resolution need only be put to shareholders if both strikes occur after 1 July 2011 (so unfavourable remuneration report votes cast at AGMs prior to 1 July 2011 will not count as a 'first strike').
The amending legislation prohibits 'key management personnel' (KMP) and their 'closely related parties' from voting on the remuneration report and the spill resolution. It is clear that KMP and their closely related parties can, in their capacity as proxyholders, vote a directed proxy on the remuneration report. As a result of some legislative overlap, however, uncertainty surrounds whether or not the chairperson (who may be a KMP or a closely related party) can vote undirected proxies on the remuneration report. We can assist in dealing with this uncertainty in respect of your 2011 AGM, after which it is expected that Parliament will clarify the legislation.
Other important legislative changes
Whilst much of the focus around the implementation of the new legislation has been on the 'two strikes' rule, there are other important changes that will have a practical impact on preparing for 2011 AGMs. These changes include:
- Remuneration consultants and remuneration recommendations disclosure requirements – the use of remuneration consultants must be approved by the board or the remuneration committee (if any) before they are engaged, and various details about the use of the remuneration consultants must be disclosed. Measures to simplify remuneration reports are also included in the reforms.
- Cherry picking of proxies – non-chair proxyholders are no longer permitted to 'cherry-pick' the directed proxies they hold when voting. If a non-chair proxyholder chooses to vote on a poll, the proxy must vote all of their directed proxies. If a non-chair proxy does not attend the meeting or does not vote the directed proxies, the vote will default to the chair, who must vote all directed proxies.
- Hedging of incentive remuneration prohibited – KMP (or a closely related party) of disclosing entities must not enter into any arrangement that will limit their exposure to the risk which relates to an element of their remuneration that has not yet vested, or has vested but remains subject to a holding lock.
- No vacancy rule – the changes prevent boards from setting a board limit unless a resolution has been passed by members approving the proposal to set the limit.
Preparing for your 2011 AGM
In addition to understanding the implications of this new legislation, there are a number of practical steps that you should take before this year's notice of AGM is prepared and sent to members. We suggest that all companies:
- review last year's remuneration report and consider whether any action has been taken in response to comments of, and the votes cast by, shareholders to avoid a first strike being recorded at the 2011 AGM;
- review (and potentially amend) your proxy forms to ensure that they comply with the new legislation. In particular, make sure any votes cast by the chair do not fall foul of section 250R of the Act in relation to any undirected proxies on the remuneration report and, more generally, that votes cast by proxyholders are not invalid due to a technicality (as this could potentially give rise to a 'first strike');
- prepare the AGM notice and explanatory memorandum in a way which clearly explains the operation of the two strikes rule;
- consider the implications of the restrictions on voting by KMP when preparing your voting exclusion statements;
- consider whether the current maximum number of directors set out in the constitution is appropriate; and
- finally, be aware of the changes relating to the engagement of remuneration consultants and ensure that KMP within your organisation are aware of the remuneration hedging restrictions.