The Federal Government has fast-tracked its crackdown on
directors' and executives' termination payments.
Three weeks after receiving public comment on a draft version,
the Government has today introduced the final Bill into
As noted in our previous
Alert, the Government's main aim is to require shareholder
approval for termination payments that are more than one year's
The Bill introduced into Parliament today does not change that.
However, some other key provisions have changed - and not
necessarily for the better.
Timing Of Shareholder Vote
Under the current law, shareholders vote on a director's
termination payment while the director is still in office. Under
the draft Bill, that vote would only take place after the director
had left office (on the grounds that shareholders would then have a
better idea of how the director had performed).
As we pointed out in our submission to Treasury, this was a
proposal that was fraught with problems. Not the least of those was
that shareholders might rationally decide that there's no point
in approving a termination payment after a director has left
office, regardless of how well the director has performed.
The Government has responded by dropping the idea. As a result,
shareholders will continue to vote on a director's termination
payment while the director is in office.
The good news about shareholder votes is, however, somewhat
offset by what the Government now proposes to do to contracts that
are already in existence when the Bill is passed.
There has been considerable confusion about this issue, going
right back to the Government's first announcement about its
The draft Bill proposed that the new 12 month base salary
limitation would only apply to:
new contracts entered into after the Bill became law; and
pre-existing contracts that had been extended after the Bill
Our previous Alert pointed out that this was a fairly woolly
test. In legal terms, there are no hard and fast rules about how
far you can amend an existing contract before it becomes a
Rather than just making it clear that the restrictions only
apply to completely brand new contracts, the new Bill goes the
other way, and sets out rules for determining when a pre-existing
contract will be caught by the new restriction. According to the
Explanatory Memorandum accompanying the Bill, the new restrictions
will apply to:
"existing contracts for which a variation of a condition is
made. Minor changes to an existing contract would not be considered
a variation of a condition. However, changes that effect an
essential term, including any term relating to remuneration would
be considered a variation of a condition."
This suffers from all of the problems of the original proposal
(only a court will be able to decide what constitutes a "minor
change" or an "essential term"). More worryingly, it
appears to mean than any change to the remuneration terms of a
pre-existing contract would bring the director under the new 12
month base salary limitation rule.
Where To Now?
The fact that the Bill has now been introduced into Parliament
does not, of course, mean that it will be passed in its current
form. We will be tracking its progress through Parliament and
keeping you up to date with developments as they happen.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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On 12th November 2016, new laws will commence to protect small businesses from unfair terms in standard form contracts.
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