The Federal Government's proposed amendments to the Corporations Act 2001 (Cth) (Corporations Act) with regard to executive termination payments passed through both houses of Parliament last month. These changes were introduced by the government in response to heightened shareholder backlash against termination benefits paid to senior executives in the context of the global financial crisis.
The changes, which place greater restrictions on a company's ability to pay an executive termination benefits without shareholder approval, took effect at the end of November.
What are the changes?
Previously, shareholder approval was only required for directors' termination benefits if they are worth more than seven years average base salary. The only other constraint on executive terminations payments was pursuant to the ASX Rules with regard to public companies. However, the Corporations Act has now effectively reduced the threshold for all companies for shareholder approval of executive termination payments to 12 months or more base salary.
Pursuant to the changes, a company must not give a person a benefit of greater than 12 months base pay 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 shareholder approval (subject to some exemptions, discussed below).
If termination benefits in excess of 12 months base pay are not authorised by shareholders, the Corporations Act now provides that the termination benefits must be re-paid immediately.
The definition of termination benefit has been clarified under the changes and now includes, amongst other things, payment in lieu of notice of termination, real or personal property, an out of court settlement, any payment (including a short term incentive payment) and automatic vesting of an equity on termination.
The changes also modify the scope of to whom the provisions of the Corporations Act apply, broadening their application beyond directors and officers of the company to include senior executives and key management personnel.
The calculation of base salary is based on the average salary received during the last three years of service or for a person with less than a year in office, the threshold will be adjusted on a pro-rata basis.
Where a payment is made in respect of the executive's past services to the company or as part consideration for the executive taking up the position as a director or key management person of the company, and is less than 12 months base salary, approval is not required.
The changes also increased the penalties for breach of the provisions of the Corporations Act to up to $19,800 for natural persons, $99,000 for a body corporate, and further provide for the imposition of a six month imprisonment term.
Do the changes have retrospective application?
The changes to the Corporations Act apply in relation to a retirement from an office or position of employment held under an agreement entered into, renewed or extended or varied after the day on which the changes commenced.
Therefore, these changes will not affect contracts entered into prior to the commencement of the changes unless the contract is renewed, extended or varied on or after the commencement.
What are the implications for employers?
In light of the changes to the Corporations Act, employers should consider:
- reviewing the terms of the contracts for employees who are directors or key management personnel, and consider whether any variations are likely to be necessary or whether shareholder approval should be sought;
- reviewing any company incentive schemes and consider whether the schemes contemplate provision of termination benefits and whether shareholder approval should be sought;
- seeking advice before amending, extending or varying any existing executive contracts with significant termination benefits; and
- seeking advice before making any payments to employees who are directors or key management personnel on termination of employment or resignation from office.