The Supreme Court of WA considered recently whether shareholder approval of an executive’s termination payment was required because a “review” of the executive’s remuneration was in substance a “variation” of their employment agreement. Apex Minerals NL argued that shareholder approval was required for the payment to its former managing director, Mark Ashley, pursuant to section 200B of the Corporations Act 2001. The company said the reviews to Mr Ashley’s remuneration since 2006 were a variation of a condition of his employment agreement. The Court rejected that argument, but the company has appealed the decision and Justice Le Miere of the Court has ruled subsequently that the company’s case is arguable. 

Mr Ashley entered an employment agreement with the company on 13 April 2006 for a term of three years, though his appointment as managing director was to continue until termination of the agreement. 

On termination the parties entered into a settlement deed by which the company would pay Mr Ashley an amount of $1,272,000 comprising:

  1. an eligible termination payment of $720,000 (effectively payment in lieu of 12 months’ notice);
  2. accrued annual leave of $79,000;
  3. additional annual leave for time in lieu of $233,000; and
  4. unpaid salary of $240,000.    

Mr Ashley issued a statutory demand on 27 June 2012 in the amount of $1,272,000 and the company applied to set aside the demand. 

The company conceded that the accrued annual leave and the unpaid salary was owed to Mr Ashley.  But the company argued there was a genuine dispute as to the eligible termination payment and the additional annual leave payable for time in lieu (approximately $950,000 in total) because the payment of those amounts is prohibited by section 200B Corporations Act

Regulation of retirement benefits since 24 November 2009

Section 200B(1) provides relevantly that an entity such as the company “must not give a person a benefit in connection with a person’s (the retiree’s) retirement from an office, or position of employment, in a company or related body corporate if…the office or position is a managerial or executive office” unless there is member approval under section 200E for the giving of the benefit. 

But section 200F(2) effectively exempts the payment of retirement benefits in certain circumstances from the requirements of section 200B.  Section 200F, as amended, was introduced into the Corporations Act by the Corporations Amendment (Improving Accountability on Termination Payments) Act 2009 (Cth) (Amending Act). Before those amendments, the payments to Mr Ashley would have been exempt retirement benefits, in that shareholder approval would not have been required. 

The issue to be determined was whether section 200F, as amended, applies to the payments to Mr Ashley. The Amending Act provides that the amendments apply to a retirement from office or position of employment held under an agreement entered into, renewed or extended, or for which “a variation of a condition of the agreement happens on or after” 24 November 2009.

A “review” or a “variation”?

The company accepted that Mr Ashley’s agreement was entered into before 24 November 2009, but argued that the amounts demanded by Mr Ashley arose from a variation of a condition of the agreement that happened after that date.  The company considered that a review of Mr Ashley’s salary on 7 December 2009 and a further increase, subject to meeting certain production targets, from 31 March 2010 were (relevantly) variations. On 3 December 2010, the company informed Mr Ashley that his remuneration package had again been reviewed and that he was entitled to a cash short-term incentive based on his ability to earn up to 50% of his base salary over a 12-month period upon achieving certain predetermined targets.  Other changes were made after 24 November 2009 to Mr Ashley’s entitlement to a motor vehicle. 

Master Sanderson rejected the company’s arguments that these were “variations” (as contemplated in the Amending Act) because clause 4.1(b) of Mr Ashley’s employment agreement provided for an annual review of his salary.  The Master stated that what the parties anticipated by that clause “was an annual review of [Mr Ashley’s] entitlements”, with the consequence that there was no variation and the demand should not be set aside. 

Further consideration by the Court

The company applied for an extension of time to comply with the demand while it appealed Master Sanderson’s decision.  Justice Le Miere granted that extension of time, and observed that the explanatory memorandum to the Amending Act stated that “changes that effect an essential term, including any term relating to remuneration, would be considered a variation of a condition”. 

Justice Le Miere held that it was arguable that an increase in Mr Ashley’s remuneration did constitute a variation of a condition of the agreement even where the increase occurs pursuant to a review provided for in the agreement itself. His Honour considered that the company‘s case was strengthened in Mr Ashley’s case by the fact that the changes in December 2009 and December 2010 provided for increases in salary and an entitlement to short-term and long-term incentive payments. In addition, Justice Le Miere considered it was arguable that the employment agreement provided no basis for the payment of additional annual leave for time in lieu, and so that entitlement agreed to by the plaintiff was also arguably a variation.  The company’s appeal is to be heard in June 2013.

Approval for termination payments

Given the continuing weakness in global capital markets, many companies will be assessing current arrangements with their executives and managers. A company making a termination payment to an executive pursuant to an agreement entered into before 24 November 2009 should consider carefully its potential obligation to obtain shareholder approval under Division 2 of Part 2D of the Corporations Act 2001, particularly where there have been increases to the executive’s remuneration pursuant to that agreement and even though that agreement provides for a review of remuneration. Of course, those potential obligations remain for retirement benefits relating to an agreement entered into after 24 November 2009.