Recent amendments to the Corporations Act 2001 (Cth)
(Act) tighten restrictions on termination payments
which can be made to executives without shareholder approval.
This article discusses the key changes and looks at the
implications for employers.
Background to amendments
The changes to the Act to restrict termination payments to
executives were first announced in March 2009 by the Federal
Government amidst negative media surrounding what were perceived as
excessive retirement payments to executives.
The Federal Government's response on executive termination
pay came into operation on 24 November 2009, in the form of the
Corporations Amendment (Improving Accountability on Termination
Payments) Act 2009 (Amending Act). The
Amending Act applies to any new employment contracts entered into
on or after 24 November 2009, and any existing employment contracts
varied on or after 24 November 2009.
Significantly lower threshold4>
Previously, termination benefits to directors and certain
executives could reach up to seven times a recipient's total
annual remuneration before shareholder approval was required. The
key change brought about by the Amending Act is that termination
benefits paid to directors or certain executives are limited to one
year's base salary, unless shareholder approval is
There is a formula in the Amending Act to calculate a
person's "annual base salary". This formula is based
on the average amount of base salary received by the person in the
last three years of service.
Extension of scope to executives – who is
The category of individuals captured by the Amending Act is
broader. Under the Act (pre-24 November 2009 contracts), the
requirement to obtain shareholder approval for termination benefits
applies only to company directors (and certain executives who act
as "de facto" directors). Now, the Amending Act (24
November 2009 contracts onwards) applies to senior executives or
key management personnel. The effect is that for a disclosing
entity, the category includes directors, and employees whose
details were included in the directors' report for the previous
financial year. For all other entities, the category includes
directors in the company and any individuals who hold a position
connected with managing the company who are also directors of a
related body corporate.
What type of benefits are captured?
Under the old regime, there was legal ambiguity as to whether
certain types of payments met the definition of a termination
payment, and therefore, whether the payments required shareholder
approval. The Amending Act has clarified and expanded the
categories of payments taken into account. For instance, the
definition includes any payment or other valuable consideration,
any kind of real or personal property, any legal or equitable
estate or interest in real or personal property and any legal or
equitable right. Further, the Amending Act specifies that a broad
interpretation should be given to the definition of
"benefits" and that the economic and commercial substance
of the conduct is to prevail over its form or description. This is
said to be designed to allow Courts to respond flexibly to changes
in executive remuneration conditions. The effect is likely to be
that almost any type of conceivable benefit is captured.
Who votes on approving the payment?
Under the new regime, there are restrictions on who can vote in
the shareholder approval process. The individual who the payment
relates to, or an associate of the individual, is prohibited from
participating in the shareholder vote about whether to approve
their termination payment.
What are the penalties involved?
The penalties for a company paying a termination benefit in
breach of the shareholder approval provisions have been
strengthened to $19,800 for natural persons or imprisonment of up
to 6 months, or up to $99,000 for a body corporate.
Implications for employers
The Amending Act introduces a significant tightening on the
restrictions surrounding executive termination payments. Employers
must be cautious about how benefits connected with termination are
provided. As a first step, employers should audit termination
clauses of all executive contracts or any other enforceable terms
giving rise to benefits (such as salary increase letters) to ensure
any termination benefits do not have unintended consequences
arising from the operation of the Amending Act. Remuneration should
also be reviewed with a view to ensuring termination benefit
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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Australian employees receive certain entitlements (such as annual leave and superannuation) where contractors do not.
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