Listed companies facing their first AGM since the introduction of the 'two strikes' rule and related changes to the Corporations Act 2001 (Cth) will need to prepare by reviewing and updating their practices. Some of the issues to be considered are:
- Does the notice of meeting disclose the implications of the two strikes rule and the new voting exclusions applicable to key management personnel and their closely related parties?
- How will undirected proxies given to the chair on the resolution to adopt the remuneration report be treated in light of ASIC's recent guidance, and do the notice of meeting and proxy form reflect the chosen approach?
- Have procedures been implemented, in conjunction with the company's share registry, to identify key management personnel and their closely related parties and to enforce applicable voting exclusions?
- Should the remuneration report resolution be put to a poll, and are arrangements in place for conducting the poll and counting the votes?
- Has the company's constitution been reviewed to determine whether the eligibility requirements for nomination as a director need to be amended to ensure that incumbent directors will be eligible to stand for re-election if a 'spill meeting' is required at next year's AGM?
- Has consideration been given to whether any maximum number of directors specified in the company's constitution remains appropriate, and if not, will shareholder approval be sought for any proposed amendment to this, or for any 'board limit' resolution?
- Have procedures been put in place for identifying and voting proxies that default to the chair on a poll?
- Who will keep a detailed record of shareholders' questions and comments on the remuneration report at the AGM, so that the board can explain its response in the subsequent remuneration report, if required?
Effect of executive remuneration legislation on notices of meeting
The Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 (Cth)(Executive Remuneration Act) has introduced changes that have various implications for the content of a listed company's notice of annual general meeting (AGM). Click here to read our Alert on the commencement of the Executive Remuneration Act.Note that all references to sections in this article are to sections of the Corporations Act 2001 (Cth).
For a company's first AGM since 1 July 2011, the notice of meeting should contain an outline of the consequences where at least 25 per cent of the votes cast on the resolution to adopt the remuneration report are against it (a strike). Specifically, the notice should refer to the requirement for the next remuneration report to disclose the board's response to shareholder comments on the report, and to the need for a 'spill resolution' to be put to the next AGM if there is a second strike at that AGM. While there is no specific statutory requirement to disclose this information, it seems material to the shareholders' decision how to vote on the resolution and therefore ought to be disclosed under general law principles.
The notice should also outline the new voting exclusions that apply to key management personnel (KMP) and their closely related parties (CRP) on remuneration-related resolutions, and the position that applies to undirected proxies held by the chair (as outlined below). The notice may also need to be updated to refer to the new provisions for proxies to default to the chair where the nominated proxy fails to vote on a resolution (also outlined below).
For subsequent AGMs, specific notice requirements will apply under section 249L(2) if the company received a strike on its remuneration report at its last AGM. In summary, the notice will need to explain the circumstances in which a spill resolution would need to be put to shareholders at the later AGM, and inform shareholders that the spill resolution would be put to the AGM in those circumstances.
Effect of executive remuneration legislation on voting and proxy forms
Restrictions on voting by KMP and CRP
The Executive Remuneration Act introduced new voting exclusions on the resolution to adopt the remuneration report (sections 250R(4) and (5)):
- KMP for whom details of remuneration are included in the remuneration report, and their CRP, must not vote their own shares on the resolution;
- a proxyholder appointed by KMP or CRP must not vote on the resolution, in respect of that appointment;
- KMP and CRP must not vote on the resolution as proxyholders of undirected proxies – they may vote directed proxies given by shareholders who are not KMP or CRP.
If the remuneration report resolution receives two consecutive strikes, these voting exclusions will also apply to the spill resolution (section 250V(2)).
If the chair of the meeting is the chair of directors or another director, and therefore a member of the KMP, it is currently unlawful for the chair, as proxyholder, to vote undirected proxies on the resolution to approve the remuneration report (section 250R(4)). This is inconsistent with the chair's ability to vote undirected proxies in certain circumstances under section 250BD and does not reflect the intention stated by the Government in the explanatory memorandum for the Executive Remuneration Act. The practical effect of this inconsistency is discussed below.
KMP and their CRP are also precluded from voting as proxyholders on any other resolution connected directly or indirectly with the remuneration of any member of the KMP, if the proxy is an undirected proxy (section 250BD(1)). As noted above, there is an exception that permits the chair of the meeting to vote, as proxyholder, undirected proxies in his or her favour, provided the appointment expressly authorises the chair to exercise the proxy even if the resolution is connected directly or indirectly with the remuneration of a member of the KMP (section 250BD(2)).
Click here to access a table that summarises the restrictions on KMP and their CRP voting on remuneration and spill resolutions.
Transfer of directed proxies to the chair
In response to concerns about 'cherry-picking' of proxies, there are new rules to ensure that all directed proxies are voted on a poll. These rules apply where a shareholder appoints someone other than the chair as their proxy and directs the proxy how to vote on a resolution.
If the nominated proxyholder fails to vote on the resolution on a poll, the chair is taken to have been appointed as the shareholder's proxy for the purpose of voting on that resolution (section 250BC). The chair is obliged to exercise all proxies on a poll (this has not changed).
Procedures will therefore need to be implemented to identify all directed proxies that default to the chair on a poll and ensure that the chair exercises them.
Voting and comments on the remuneration report
In practice, the two strikes rule means that listed companies now need to count, and keep a record of, the number of votes cast for and against the resolution for adoption of the remuneration report so that they can determine whether less than 25 per cent of the votes cast on the resolution were against its adoption. For many companies (especially those who have high attendances at their AGMs), this is likely to require the resolution to be put straight to a poll at the AGM, rather than a show of hands. Perhaps this will lead to an increasing tendency for chairs to call a poll on all resolutions at a listed company's AGM?
If comments are made on a company's remuneration report at an AGM and there is a 'no' vote of at least 25 per cent of the votes cast on the resolution for the report's adoption, the company's next remuneration report will need to include an explanation of the board's proposed action in response or, if no action is proposed, the board's reasons for inaction (section 300A(1)(g)).
Companies should therefore keep a detailed record of any comments made on the remuneration report at the AGM and include an appropriate summary of the comments in the minutes of the meeting.
Can a chair vote undirected proxies on the resolution to adopt the remuneration report?
The exception in section 250BD(2) to allow the chair, as proxyholder, to vote undirected proxies in certain circumstances is not available on the resolution to adopt the remuneration report due to the operation of section 250R(4).
The Parliamentary Secretary to the Treasurer, the Hon David Bradbury MP, issued a 11 August 2011 media release confirming that the Government will introduce 'amendments [that] will clarify the ability of the chair, who is a member of the key management personnel, to vote undirected proxies in the non-binding vote where the shareholder provides their explicit consent for the chair to exercise the proxy' in the spring sitting of Parliament (which runs until late November 2011). No Bill has yet been introduced to give effect to these amendments. At the time of writing, Parliament is in recess and will resume on 12 September 2011.
ASIC indicated in a media release (MR 11-164AD) that there are four alternative options available to address this issue in the interim. These are outlined below. The right choice will depend on each company's circumstances. We can assist you to choose and implement the best approach for your company.
Option 1 – Ensuring the chair does not vote undirected proxies on the remuneration report resolution
The first solution is the simplest – make sure the chair does not vote any undirected proxies on the resolution to adopt the remuneration report. The disadvantage is that it may disenfranchise shareholders. If companies adopt this approach, ASIC encourages them to inform their shareholders that their votes will not be counted if they provide an undirected proxy on the remuneration report resolution, in order to minimise the number of uncounted votes.
Option 2 – Changing the proxy form so that there are more directed proxies
ASIC has stated that it encourages 'companies to explore options that are consistent with the new provisions that would enable proxy votes to be counted on remuneration resolutions by ensuring that the proxy given is a directed proxy'.
One option is to include prominent, clear and express wording in the proxy form to the effect that failing to tick the 'for', 'against' or 'abstain' box means that the shareholder has directed the chair to vote in accordance with the chair's clearly stated voting intention (as disclosed in the notice of meeting and the proxy form). This option ensures that all proxy votes given to the chair will be counted, as all proxies held by the chair on the resolution to adopt the remuneration report will be directed – whether by choice or default.
ASIC cautions companies following this course to make it clear to shareholders that they can appoint the chair as proxy with a direction to cast votes contrary to the chair's stated voting intention, or to abstain from voting. In other words, companies following this course should ensure that shareholder choice is not unduly influenced.
Option 3 – Enabling appointment of a non-KMP proxy
Another option outlined by ASIC is for companies to structure proxy forms so that, for the purposes of the resolution to adopt the remuneration report, shareholders may appoint a proxy who is not a member of the KMP (or their CRP). There is nothing in the legislation to prevent that person from voting undirected proxies.
Option 4 – ASIC relief
ASIC cannot grant class order relief in relation to the chair's ability to vote on the remuneration report resolution. However, ASIC can grant relief upon receipt of an individual application to enable the chair to cast undirected proxies on a specific remuneration report resolution. ASIC must be satisfied that the grant of relief will not cause unfair prejudice to the interests of any member of the company.
ASIC has set out the matters it expects to be covered in any application for relief in its 10 August Information Sheet 144 Annual general meetings: Voting on the remuneration report resolution. Companies wishing to apply for relief should also refer to ASIC's policy in Regulatory Guide 51 Applications for relief.
Spill resolutions – get ready
The two strikes rule requires that a spill resolution be put to an AGM if, at both that meeting and the AGM immediately prior, at least 25 per cent of the votes cast on the resolution for adoption of the remuneration report were against its adoption.
The effect of the spill resolution is that, if it is passed:
- the company will be required to convene another general meeting (spill meeting) within 90 days of the later AGM; and
- every director (other than any managing director who may hold office indefinitely in accordance with applicable listing rules) who held office when the resolution by the directors to make the remuneration report considered at the later AGM was passed will cease to hold office immediately before the end of the spill meeting; and
- elections must be held at the spill meeting to fill the offices that will be vacated by the end of the meeting.
The new rules do not provide that the incumbent directors are automatically eligible to stand for re-election at a spill meeting. Accordingly, listed companies should review their constitutions now to determine how any notice and eligibility requirements for election as a director would apply in the event of a spill meeting.
While directors retiring by rotation are often exempt from these requirements, these exemptions would often not extend to ceasing to hold office by operation of law (as would occur at the end of a spill meeting).
Depending on a company's constitution and circumstances, it may therefore be desirable and appropriate to seek shareholder approval to amend the constitution to ensure that incumbent directors can stand for re-election at a spill meeting, without having to satisfy any constitutional nomination or eligibility requirements.
Board limits – the 'no vacancy' rule
From 1 July 2011, the directors of a public company must not set a board limit unless the shareholders pass a board limit resolution approving the proposed limit at a general meeting (section 201P(1)). Any board limit resolution only has effect until immediately before the start of the next AGM.
Section 201P provides that the notice of the general meeting must:
- state the resolution and set out an intention to make it at the meeting, and
- be accompanied by an explanatory statement setting out:
- the directors' reasons for proposing the resolution; and
- all other information known to the company or any of its directors that members may reasonably require in order to be able to determine whether the resolution is in the best interests of the company.
These new provisions only apply where:
- the constitution of the company specifies the maximum number of directors and allows the directors to set a limit whose effect is to restrict the number of directors to a lower number than the maximum (section 201N(1)), in which case any such limit determined by the board would be a board limit; or
- the constitution says that the maximum number of directors is either a specified number or another number determined by the directors, in which case any number determined by the directors that is lower than the specified number, or than a previously determined lower number, would also be a board limit (section 201N(2)).
In this context, companies should consider whether any maximum number of directors specified in their constitution remains appropriate for their current circumstances. If this number is disproportionately high, a company may wish to seek shareholder approval to reduce the maximum number of directors (by way of constitutional amendment).
Click here to view Bob Austin discussing the AGM season on AFR TV's 'Austin Legal'.
This article is from our September 2011 edition of Corporate HQ Advisory newsletter.