The government has released its draft legislation to broaden the circumstances where shareholder approval will be required for the payment to directors and executives of termination benefits as announced on 18 March 2009. The legislation applies to all companies.

Currently shareholder approval is required for benefits paid in connection with the retirement from office of a director where the benefit exceeds seven times the director's average total annual remuneration (that is the amount required to be disclosed in financial statements about director's remuneration) for the last three years.

The government, as previously announced, proposes to limit the amount to the person's average annual base salary, as determined under the Accounting Standards, during the last three years during which the person held a managerial or executive position. For shorter periods there are shading in provisions.

In the case of listed entities the new rules will apply to key management (as determined under the Accounting Standards) and the five highest remunerated executives as detailed in the directors' report for the previous financial year. For any other body corporate it is directors and directors of a related body corporate.

In addition to the existing circumstances of when a benefit is taken to be given in connection with a person's retirement form an office or position the circumstances are to be extend by the new regulations to include the automatic or accelerated vesting of options and a payment in lieu of giving notice of termination.

A meeting cannot be called for the sole or dominant purpose of passing a resolution to approve benefits that are greater than the prescribed limit. The resolution may only be considered at a meeting called to deal with other business of the entity. The government's rationale for this is to reduce the compliance costs. In addition the person must have retired before any notice of meeting is given which is intended to ensure that shareholders have an understanding of how the person has performed before exercising their vote.

A proposed new definition of 'benefits' is designed to capture every imaginable benefit. This will be augmented by regulations. Under the proposed regulations benefits will include pensions, superannuation payments in excess of the statutory amount and voluntary out of court settlements. Benefits will not include deferred bonuses and payments from existing defined benefits superannuation funds.

Provision is made to require immediate repayment of any benefit given in contravention of the requirement to obtain shareholder approval in addition to the existing requirement to hold any benefit in trust for the entity.

The maximum fines for breaches will be increased to $19,800 for individuals and $99,000 for corporations.

The government has called for public comment on the draft legislation. Submissions may be made on or before 2 June 2009. Please contact the authors if you require further information concerning the proposed legislation or would like assistance in formulating a submission.

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further − by connecting you to a global network of legal experience, talent and knowledge.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.