Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2008 - 2009
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
cORPORATIONS AMENDMENT (IMPROVING ACCOUNTABILITY ON TERMINATION payments)
BILL 2009
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Minister for Financial Services, Superannuation and Corporate Law,
the Hon Chris Bowen MP)
Table of contents
Glossary 1
General outline and financial impact 3
Chapter 1 Introduction 5
Chapter 2 Schedule 1 - Amendments 7
Chapter 3 Part 2 - Other Amendments 17
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
|Abbreviation |Definition |
|Bill |Corporations Amendment |
| |(Improving Accountability on |
| |Termination Payments) Bill |
| |2009 |
|Act |Corporations Act 2001 |
General outline and financial impact
Outline
The Corporations Amendment (Improving Accountability on Termination
Payments) Bill 2009 (the Bill) strengthens the regulatory framework
relating to the payment of termination benefits to company
directors and executives.
Date of effect: Sections 1 to 3 of the Bill commences on Royal
Assent. Schedule 1, part 1 of the Bill commences on the day after
Royal Assent. Schedule 1, part 2 commences immediately after part
1 commences. Schedule 1, part 3 commences on the day after Royal
Assent.
Financial impact: This Bill has no significant impact on
Commonwealth expenditure or revenue.
Compliance cost impact: Nil.
Summary of regulation impact statement
Regulation impact on business
Impact: The Office of Best Practice Regulation has been consulted
and has advised that a Regulation Impact Statement is not required
due to the Government's prior announcement to progress reforms in
this area. Instead, a post-implementation review of the new
amendments will be made within one to two years of the commencement
of the new requirements.
Chapter 1
Introduction
Clause 1: Short title
1. The Act may be cited as the Corporations Amendment (Improving
Accountability on Termination Payments) Act 2009.
Clause 2: Commencement
2. Each provision of the Act specified in column 1 of the table
commences, or is taken to have commenced, in accordance with column
2 of the table. Any other statement in column 2 has effect
according to its terms.
|Commencement information |
|Column 1 |Column 2 |Column 3 |
|Provision(s)|Commencement |Date/Detail|
| | |s |
|1. |The day on which this Act | |
|Sections 1 |receives the Royal Assent. | |
|to 3 and | | |
|anything in | | |
|this Act not| | |
|elsewhere | | |
|covered by | | |
|this table | | |
|2. |The day after this Act | |
|Schedule 1, |receives the Royal Assent. | |
|Part 1 | | |
|3. |Immediately after the | |
|Schedule 1, |provision(s) covered by table| |
|Part 2 |item 2. | |
|4. |The day after this Act | |
|Schedule 1, |receives the Royal Assent. | |
|Part 3 | | |
Clause 3: Schedules
3. Each Act that is specified in a Schedule to the Act is amended or
repealed as set out in the applicable items in the Schedule
concerned, and any other item in a Schedule to the Act has effect
according to its terms.
Chapter 2
Schedule 1 - Amendments
Outline of chapter
4. Schedule 1 amends the Corporations Act 2001 (the Act) to strengthen
the regulatory framework relating to termination benefits.
Context of amendments
5. In March 2009, the Government announced reforms aimed at curbing
excessive termination benefits paid to company executives. There
is significant community concern about excessive pay practices,
particularly at a time when many Australian families are being hit
by the global recession. The Government is determined to ensure
regulation of executive pay keeps pace with community expectations.
6. The current regulatory framework allows for termination benefits to
reach up to seven times a director's total annual remuneration
package before shareholder approval is required. Additionally,
only company directors' termination benefits are subject to
shareholder approval.
7. The Bill introduces amendments to the Act to improve the existing
regulatory framework for executive pay. The reforms address
growing community concern on termination benefits and provide
businesses with certainty.
Summary of new law
8. The Bill introduces a significantly lower threshold at which
termination benefits must be approved by shareholders. Under the
new arrangements, termination benefits for company directors and
executives exceeding one year's average base salary are subject to
shareholder approval. In addition, the range of personnel whose
termination benefits can be subject to shareholder approval is
expanded from directors to also include senior executives or key
management personnel. The Bill also clarifies the types of
benefits that are subject to shareholder approval.
9. The new arrangements will not apply retrospectively to existing
contracts. The new arrangements will apply to contracts that are
entered into and renewed or extended.
10. Additionally, the arrangements 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.
11. The amendments strengthen the existing regulatory framework
applying to termination benefits by; better empowering shareholders
to disallow excessive termination benefits, particularly where they
are a reward for poor performance; improving the accountability of
company management in setting remuneration; and promoting
responsible remuneration practices.
Comparison of key features of new law and current law
|New law |Current law |
|Termination benefits for |Termination benefits can|
|directors and executives |reach up to seven times |
|exceeding one year's base|a recipient's total |
|salary is subject to |annual remuneration |
|shareholder approval. |before shareholder |
| |approval is required. |
|Scope of the regulations |Requirements relating to|
|is expanded to include |termination benefits |
|senior executives or key |apply only to company |
|management personnel of |directors. |
|the entity, where the | |
|company is a disclosing | |
|entity. | |
|The definition of a |There is currently some |
|termination benefit has |legal ambiguity as to |
|been clarified and |whether certain types of|
|expanded. The Bill |payment meet the |
|requires a broad |definition of a |
|interpretation of the |termination benefit, and|
|term benefit and requires|therefore require |
|that the substance should|shareholder approval. |
|prevail over its legal | |
|form. The Bill also | |
|includes a regulation | |
|making power to specify | |
|whether certain types of | |
|payments are a | |
|termination benefit or | |
|not. | |
|Unauthorised termination |There is no express |
|benefits must be repaid |requirement to repay an |
|immediately. Any unpaid |unauthorised termination|
|benefits will continue to|benefit. The benefit is|
|be held on trust for the |required to be held on |
|company. |trust for the benefit of|
| |the company. |
|Retirees, that hold |All shareholders are |
|shares in the company, |able to participate in a|
|can no longer participate|vote on termination |
|in a shareholder vote on |benefits. |
|their termination benefit| |
|except when acting as a | |
|proxy. | |
|The penalty provisions |The penalty provisions |
|have been strengthened to|for breaches of sections|
|180 penalty units for a |200B, 200C and 200D are |
|natural person and 900 |currently 25 penalty |
|penalty units for a body |units for natural person|
|corporate, whilst |and 150 penalty units |
|retaining the option of |for a body corporate, |
|six months imprisonment. |together with the option|
| |of six months |
| |imprisonment. |
Detailed explanation of new law
Definitions
12. The Bill defines, repeals and amends several terms used in Schedule
1 [Schedule 1, Part 1, Items 1, 2, 3, 4, 5 and 6].
13. Particularly, the definition of 'base salary' has the meaning
specified in regulations made for the purposes of this definition
[Schedule 1, Part 1, Item 1]. Given the fluidity of the definition
of 'base salary' in application, this allows flexibility for the
law to respond to an environment of rapid change and ongoing
developments. Flexibility is also required as the new arrangements
will facilitate greater understand in this area and may reveal a
case for change to provide clarity and certainty.
14. The meaning of 'benefit' is defined in section 200AB [Schedule 1,
Part 1, Item 7, section 200AB].
15. Consequential renumbering of existing references to section 200A is
made in this Bill [Schedule 1, Part 1, Item 5 and 6].
16. Consequently, the existing provisions and notes that refer to
repealed definitions are repealed in this Bill [Schedule 1, Items
16 and 18, subsection 200C(1) note 1 and subsection 200D(1) note
1].
Lowering the threshold for shareholder approval
17. Section 200B of the Act provides that termination benefits require
shareholder approval, unless an exemption applies. Exemptions to
section 200B are contained in sections 200F, 200G and 200H of the
Act.
18. The exemptions in sections 200F and 200G apply unless the benefit
exceeds a certain threshold contained in subsections 200F(3) and
(4) and 200G(2) and (3) [Schedule 1, Items 30 and 36, paragraphs
200F(2)(b) and 200G(1)(c)]. The Bill repeals the existing
threshold and introduces a new threshold calculated by the average
amount of base salary received by the person in the last three
years of service. The requirement to use the last three years of
service is intended to prevent the new law from being circumvented
by a person not holding the relevant office immediately before they
depart [Schedule 1, Item 12, subsection 200B(1)].
19. Consequential changes to subsections 200B(1A) and 200B(3) are made
as a result of the new arrangements in subsection 200B(1)
[Schedule 1, Items 13 and 14, subsections 200B(1A) and 200B(3)].
20. The Bill also sets out the methods of calculating one year's base
salary where the person has held office for less than three years.
. Where the person has held office for less than one year,
this threshold is adjusted on a pro-rata basis. For
example, where the director served for three months, the
threshold would be one-quarter of the annual base salary,
and a benefit above this would require shareholder
approval.
. Where the person has held office for one year, the annual
base salary that the person received for the year is the
threshold at which termination benefits would require
shareholder approval.
. Where the person has held office for more that one year,
but less than two years, the threshold is the average of
the first year's annual base salary and an estimation of
the base salary the person would have received after the
first year of the relevant period,(that is, in the second
year of service) had the relevant period been two years.
. Where the person has held office for two years, the
threshold is the average annual base salary during the
relevant period of two years.
. Where the person has held office for more than two years
but less than three years, the threshold is the average of
the annual base salary of the first two years and an
estimation of what the person would have received after
the second year of the relevant period, (that is, in the
third year of service) had the relevant period been three
years.
. Where the person has held office for three years or more,
the threshold is the annual average base salary during the
relevant period of three years.
[Schedule 1, Items 31 and 37, sub sections 200F(3) and (4)
and 200G(2) and (3)].
21. The Bill repeals subsection 200G(5) which defined the meaning of
eligible employee for the purposes of the existing paragraph
200G(2)(a), as this definition is no longer necessary under the new
arrangements [Schedule 1, Item 38, subsection 200G(5)].
22. The Bill amends subsection 200G(6) by inserting the definition of
relevant period for the purposes of calculating the threshold at
which termination benefits are subject to shareholder approval
[Schedule 1, Item 39, subsection 200G(6)].
Extending the scope to executives
If the company is a disclosing entity
23. For a company to which section 300A of the Act applies, the Bill
extends the scope of the provisions to apply to the key management
personnel and the five mostly highly remunerated officers (if
different) of the entity (that is, the officers named in the
remuneration report), namely a person holding 'managerial or
executive office'[Schedule 1, Item 7, section 200AA].
24. The person is taken to hold the managerial or executive office for
the whole of the current financial year unless and until the person
retires from an office or position in the company before the end of
the financial year [Schedule 1, Item 7, section 200AA]. This is to
capture persons who have not been previously included in the
remuneration report as key management personnel and who retire in
the year that they are included.
Otherwise
25. For all other entities, the existing arrangements continue to apply
to directors [Schedule 1, Item 7, section 200AA].
26. The Bill extends subsection 200A(1) to reflect the changes made in
section 200AA[Schedule 1, Item 9, paragraph 200A(1)(f)].
27. As a consequence of the new meaning of managerial or executive
office, existing references to 'board or managerial office' are
omitted and substituted with 'managerial or executive
office'[Schedule 1, Items 15, 17, 29 and 32, paragraphs 200C(1)(a),
200D(1)(a), 200F(2)(b), subsection 200F(5)].
28. Additionally, where there is existing reference to 'office', the
provision is now extended to include 'or position' to clarify the
law [Schedule 1, Items 8, 11,14, 25, 26, 27, 33 and 35, subsections
200A(1), 200A(2), 200B(3) and 200F(2), paragraphs 200F(1)(a),
200G(1)(a) and 200G(1)(c), subparagraph 200F(2)(a)(ii)].
Meaning of termination benefit
29. The Bill clarifies the definition of a 'benefit' that was
previously contained in section 9 of the Act. The new definition
is set out in section 200AB and provides that a benefit includes a
payment or other valuable consideration, any kind of real or
personal property, any legal or equitable estate or interest in
real or personal property, or any legal or equitable right
[Schedule 1, Item 7, section 200AB].
30. The Bill inserts a new section 200 which provides that a broad
interpretation to 'benefit' should be given and the substance
should prevail over its legal form [Schedule 1, Item 7, section
200]. This is similar to the provisions in section 229 of the
Act.
31. Existing section 200A will continue to define when a benefit is
given in connection with departure from office.
32. The word 'prescribed' is omitted from subparagraph 200E(2)(b)(i),
as it is not relevant [Schedule 1, Item 21, subparagraph
200E(2)(b)(i)].
33. Consequential changes are made to paragraphs 200F(2)(b) and
200G(1)(c) as a result of the meaning of termination benefit
[Schedule 1, Items 28 and 34, paragraphs 200F(2)(b) and
200G(1)(c)].
34. There is currently some legal ambiguity as to whether certain types
of payments are considered to be a termination benefit requiring
shareholder approval. To address this, the Bill contains a
regulation making power to create regulations which prescribe
things to either be a benefit, or not to be a benefit [Schedule 1,
Item 7, section 200AB]. The Bill also provides a regulation making
power to create regulations which prescribe certain types of
benefits that are taken to be given in connection with a person's
departure from office [Schedule 1, Item 10, subsection 200A(1A)].
35. The draft regulations will offer guidance and certainty, by
providing a non-exhaustive list of specific examples of payments
that will require shareholder approval, which could include, for
example, the payment of employer superannuation contributions in
excess of the statutory amount (excluding salary sacrificed
amounts); and any amounts paid as voluntary out of court
settlements.
36. The draft regulations will also prescribe, for the avoidance of
doubt, a non-exhaustive list of specific examples of payments that
will not require shareholder approval, which could include, for
example, deferred bonuses; and payments from a defined benefits
superannuation scheme that was in existence before the regulations
commenced.
37. In addition, the draft regulations will prescribe circumstances in
which a benefit is given in connection with a person's retirement
from an office or position. This could include for example, the
automatic or accelerated vesting of options and payments in lieu of
notice.
38. As with the regulation making power for the definition of 'base
salary', regulations in this area allows for flexibility to respond
to an environment in which executive remuneration conditions and
allowances rapidly change and evolve.
39. Paragraph 200F(1)(b) will continue to provide the ability to
prescribe circumstances under which a benefit given is exempt from
shareholder approval.
Shareholder voting requirements
40. The Bill retains the existing requirement for the giving of the
benefit to be approved by a resolution passed at a general meeting
[Schedule 1, Item 19, subsection 200E(1)].
41. The Bill also retains the existing requirement for details of the
benefit to be set out in, or accompany, the notice of a general
meeting that is to hold the vote [Schedule 1, Item 20, subsection
200E(2)].
42. The Bill restricts the retiree or an associate of the retiree from
participating in the shareholder vote that includes their
termination payment. This does not prevent the casting of a vote
made by a retiree acting as a proxy [Schedule 1, Item 22,
subsection 200E(2)].
43. The Bill contains a regulation making power to create regulations
which may allow retirees to vote on their own remuneration. This
is to provide flexibility in the event that circumstances arise
which may give valid cause for retirees to exercise their vote
[Schedule 1, Item 22, subsection 200E(2C)].
44. Consequential changes are made to subsections 200E(3) and 200E(4)
as a result of the new arrangements in subsection 200E(2) [Schedule
1, Items 23 and 24, subsections 200E(3) and 200E(4)].
Requirement to repay unauthorised benefit and to hold on trust
45. The Bill strengthens the regulatory framework by introducing an
express obligation on the recipient to immediately repay a
termination benefit that was given in contravention of the
requirement to seek shareholder approval under the Act [Schedule 1,
Item 40, paragraph 200J(1)(b)]. In addition, the Bill provides
that the benefit is a debt due to the entity which may be recovered
by the entity [Schedule 1, Item 40, subsection 200J(1A)]. This is
intended to better facilitate recovery of benefits that have been
given in contravention of the Act.
46. The Bill also retains the requirement for the recipient of an
unauthorised benefit to hold the benefit on trust for the entity
[Schedule 1, Item 40, paragraph 200J(1)(a)]. This is intended to
impose an additional level of accountability on the recipient,
particularly where they have failed to repay the benefit
immediately.
Penalty provisions
47. The Bill significantly strengthens the penalty provisions
associated with giving a benefit that has not received the
necessary approval by shareholders in contravention of the Act.
The penalty units in sections 200B, 200C and 200D have been
increased from 25 penalty units to 180 penalty units for a natural
person [Schedule 1, Item 41] and from 150 penalty units to 900
penalty units for a body corporate, whilst retaining the option of
six months imprisonment. In addition, the offences will remain
strict liability offences.
48. This represents a substantial increase to the penalty provisions
and is intended to reflect the seriousness of giving a termination
benefit where it has not been approved by shareholders in
accordance with the Act, and to provide a sufficient deterrent to
such unauthorised benefits.
Chapter 3
Part 2 - Other Amendments
Detailed explanation of new law
49. The Bill removes the exception in section 200F for pre-1991
contracts [Schedule 1, Item 42, paragraph 200F(1)(a)].
Index
Schedule 1: Amendments
|Bill reference |Paragraph |
| |number |
|Item 7, section 200AA |2.20, 2.21, |
| |2.22 |
|Item 7, section 200AB |2.26, 2.31 |
|Item 7, section 200 |2.27 |
|Items 8, 11,14, 25, 26, 27, 33 and 35, |2.25 |
|subsections 200A(1), 200A(2), 200B(3) and | |
|200F(2), paragraphs 200F(1)(a), 200G(1)(a) | |
|and 200G(1)(c), subparagraph 200F(2)(a)(ii) | |
|Item 9, paragraph 200A(1)(f) |2.23 |
|Item 10, subsection 200A(1A) |2.31 |
|Item 12, subsection 200B(1) |2.15 |
|Items 13 and 14, subsections 200B(1A) and |2.16 |
|200B(3) | |
|Items 15, 17, 29 and 32, paragraphs |2.24 |
|200C(1)(a), 200D(1)(a), 200F(2)(b), | |
|subsection 200F(5) | |
|Items 16 and 18, subsection 200C(1) note 1 |2.13 |
|and subsection 200D(1) note 1 | |
|Item 19, subsection 200E(1) |2.37 |
|Item 20, subsection 200E(2) |2.38 |
|Item 21, subparagraph 200E(2)(b)(i) |2.29 |
|Item 22, subsection 200E(2) |2.39 |
|Item 22, subsection 200E(2C) |2.40 |
|Items 23 and 24, subsections 200E(3) and |2.41 |
|200E(4) | |
|Items 28 and 34, paragraphs 200F(2)(b) and|2.30 |
|200G(1)(c) | |
|Items 30 and 36, paragraphs 200F(2)(b) and |2.15 |
|200G(1)(c) | |
|Items 31 and 37, sub sections 200F(3) and |2.17 |
|(4) and 200G(2) and (3) | |
|Item 38, subsection 200G(5) |2.18 |
|Item 39, subsection 200G(6) |2.19 |
|Item 40, paragraph 200J(1)(b) |2.42 |
|Item 40, subsection 200J(1A) |2.42 |
|Item 40, paragraph 200J(1)(a) |2.43 |
|Item 41 |2.44 |
|Item 42, paragraph 200F(1)(a) |3.1 |
|Part 1, Items 1, 2, 3, 4, 5 and 6 |2.9 |
|Part 1, Item 1 |2.10 |
|Part 1, Item 5 and 6 |2.12 |
|Part 1, Item 7, section 200AB |2.11 |
Do not remove section break.