UK: Directors’ Remuneration Reforms

Last Updated: 3 June 2013
Article by Paul Shapiro

Introduction

We previously reported that the Department for Business, Innovation and Skills ("BIS") is proposing a new legislative framework which is aimed at giving shareholders greater influence on the issue of executive remuneration. In March 2012 BIS published an initial consultation on the subject and in June 2012 they published another consultation proposing new standards and regulations for the reporting of executive remuneration.

In March of this year, following feedback from stakeholders, BIS published a schedule of frequently asked questions to help stakeholders understand how and when they will be affected by the reforms. This article will summarise and further examine these FAQs.

What are the proposed reforms?

The Enterprise and Regulatory Reform Bill, which will amend the Companies Act 2006, will require a directors' remuneration report to contain:

  1. a statement by the chair of the remuneration committee;
  2. the company's policy on directors' remuneration (the "Remuneration Policy"), which should include details on how the company proposes to pay directors, including every element of remuneration that a director will be entitled to. Once approved, all remuneration to directors (including those relating to loss of office) can only be made within the limits of the Remuneration Policy, unless approved by a separate ordinary resolution (i.e. 50%+1) of the shareholders. The Remuneration Policy (and any subsequent changes to it) will be subject to a binding vote by shareholders at least every three years; and
  3. information on how the Remuneration Policy was implemented in the financial year being reported on (the "Implementation Report"). This should be produced annually and will be the subject of an advisory, not binding, vote by shareholders.

Who will it affect?

  1. Which companies?

    Only "quoted companies" which, under section 385 of the Companies Act 2006, means any company registered in the UK whose shares are included in the official list in the UK or an EEA State, or are admitted to dealing on either the New York Stock Exchange or Nasdaq. It does not apply to AIM listed companies or foreign registered companies listed in the UK.
  2. All directors? Employees?

    Restrictions on remuneration and loss of office payments contained in the Remuneration Report apply only to people who are, are to be, or were directors. The Companies Act 2006 does not make a distinction between executive and non-executive directors and information about both must be included. However, the BIS report does state that "remuneration of executive directors is more complicated than that of non-executive directors and is of most interest to shareholders...[and that the] reporting regulations will take this into consideration".

Other payments the regulations cover are (i) payments a company may make to buy-out an individual's remuneration arrangements at another company, (ii) employees 'promoted' to the role of director within the financial year, and (iii) payments to previous directors.

When?

The new regime will come into force on 1 October 2013.

For any AGM held in the first financial year to begin on or after 1 October 2013, companies will need to produce a directors' remuneration report in the new format. For many quoted companies this will mean AGMs held in the Spring/Summer of 2014. At this AGM, both the Remuneration Policy and the Implementation Report must be put to shareholders for approval.

No Remuneration Policy approved prior to 1 October 2013 will be recognised as an approved Remuneration Policy for the purposes of the new legislation. However, no payment to directors before this date will be unlawful either.

What are the consequences of a company failing to obtain shareholder approval of the Remuneration Policy?

The BIS report lists the following options:

  1. continue to operate according to the last Remuneration Policy to have been approved by a shareholder resolution;
  2. continue to operate according to the last Remuneration Policy to have been approved by a shareholder resolution and seek separate shareholder approval (via a resolution at a meeting) for any specific remuneration or loss of office payments which are not consistent with the policy; or
  3. call a general meeting and put a Remuneration Policy to shareholders for approval. This could, but need not be, an amended version of the policy last put to shareholders for approval.

Options (i) and (ii) are not available in the first year after the reforms come into force, as any policy which pre-dates the new legislation is not recognised by it.

How does this impact on existing directors' service contracts?

Those not renewed or amended since 27 June 2012 will not be subject to the new restrictions.

Those entered into, and existing contracts amended or renewed on or after 27 June 2012, will be caught by the new rules. All payments made under these contracts must be consistent with the approved Remuneration Policy, even if the company has a contractual obligation to pay a director more than is permitted under its Remuneration Policy.

What happens to payments made in breach of a Remuneration Policy?

If such payments are not approved by an ordinary resolution of the shareholders, the unauthorised payment will be held on trust by the recipient and an action can be brought to recover the payment by either the directors of the company or the shareholders using their rights to shareholder derivative actions under section 260 of the Companies Act 2006.

Can directors be liable if the monies cannot be recovered?

Yes, the directors who authorised the payment can be held liable for any losses incurred as a result.

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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