The Corporations Amendment (Improving Accountability on Executive Remuneration) Bill 2011 (Bill) passed the Senate on the evening of 20 June 2011, without further amendment. It is now awaiting assent. Amendments relating to proxies and to voting by key management personnel on remuneration matters commence on 1 August 2011, and the remainder of the Bill's provisions commence on 1 July 2011.
The Bill puts into action reforms to Australia's executive remuneration framework, including:
- the introduction of the 'two strikes' rule;
- changes to disclosure required in the remuneration report;
- changes to the required content for an AGM notice;
- prohibiting 'cherry-picking' of proxies;
- prohibiting voting by key management personnel and closely related parties on remuneration matters;
- requiring shareholder approval for a declaration of 'no vacancy' on the board;
- changes to retainer and disclosure requirements in relation to remuneration consultants; and
- prohibition of the use of hedging arrangements by key management personnel or their closely related parties to limit exposure to the risk elements of remuneration.
'Two strikes' rule
To recap, the Bill introduces a 'two strikes' rule for listed companies (sections 250U-250Y), effective 1 July 2011. It provides that if:
- at least 25% of the votes cast at an AGM (the later AGM) on a resolution that the remuneration report be adopted under subsection 250R(2) are against the adoption of the report; and
- at the immediately preceding AGM (the earlier AGM) at least 25% of the votes cast on a resolution that the remuneration report be adopted were also against the adoption of the report; and
- no spill resolution was put at the earlier AGM,
then a board spill resolution must be put at the later AGM.
The board spill resolution must be that:
- a specially convened general meeting (spill meeting) be held within 90 days; and
- all directors who:
- held office when the resolution by the directors to make the director's report considered at the later AGM was passed; and
- are not a managing director that may hold office indefinitely in accordance with the listing rules of a prescribed financial market (and the company is included on that market's official list),
cease to hold office immediately before the end of the spill meeting; and
- elections to appoint persons to offices that will be vacated before the end of the spill meeting must be held at the spill meeting.
The 'two strikes' rule will apply only if both of the company's two most recent AGMs are held on or after 1 July 2011.
The Opposition unsuccessfully introduced amendments in the Senate to change the requirement from 25% of the votes cast on the resolution to 25% of the total votes that were able to be cast on the resolution. Opposition amendments in the same terms had been introduced and defeated in the House of Representatives on 12 May 2011.
Key management personnel salary ceiling defeated
An amendment proposed by the Greens in the Senate to cap salary for key management personnel at 30 times the average salary or wage of an employee of the relevant person's company was defeated.
As reported in our previous Alert, Government amendments passed by the House of Representatives mean that the following provisions of the Bill will commence on 1 August 2011:
- the prohibition on key management personnel of a listed company and their closely related parties:
- voting on the remuneration report at the AGM; or
- exercising undirected proxies on remuneration-related resolutions; and
- the 'cherry-picking' prohibition (that is, requiring proxies to vote in the way specified in the appointments).
The remainder of the Bill's provisions will commence on 1 July 2011.
So, what are the other things to be aware of for this AGM and reporting season?
Content of directors' report (section 300A)
Amendments to section 300A that alter the required content for a listed company's remuneration report by:
- limiting the required disclosure to the consolidated entity;
- removing the requirement to disclose prescribed details of remuneration of the five most highly remunerated executives (the requirement to disclose prescribed details of remuneration in relation to key management personnel remains unchanged);
- requiring an explanation of the board's proposed action, or an explanation for proposed board inaction, regarding a 25% vote against the remuneration report at a previous AGM; and
- requiring disclosure of details about the use of remuneration consultants,
will commence 1 July 2011 and apply in relation to remuneration reports for financial years starting on or after that date. Therefore, the first reporting year will be 2012.
Notice of AGM (subsection 249L(2))
The Bill amends subsection 249L(2). A notice for an annual general meeting held on or after 1 July 2011 must:
- inform members that the subsection 250R(2) resolution on adoption of the remuneration report will be put to the meeting; and
- explain the application and operation of the 'two strikes' rule if at least 25% of the votes cast at an AGM are against the subsection 250R(2) resolution to adopt the remuneration report.
Proxies (sections 250BB-250BD)
New section 250BB, which will restrict voting at a general meeting by the chair or other holder of a directed proxy, will apply to voting that takes place on or after 1 August 2011, regardless of whether the proxy was appointed before, on or after that date.
New section 250BC deems the chair to have been appointed proxy in certain circumstances in respect of votes on a resolution at a general meeting. It will apply to proxy appointments made on or after 1 August 2011.
New section 250BD, which will prevent key management personnel within a corporate group and their closely related parties from voting undirected proxies on a resolution connected with key management personnel remuneration, will apply to voting on or after 1 August 2011 whether the resolution relates to a time before, on or after that date.
Voting on the remuneration report by key management personnel and related parties (subsections 250R(4)-(10))
Members of key management personnel (and their closely related parties) will be prohibited from voting – either personally or by undirected proxy – on the resolution on the remuneration report at the AGM of a listed public company from 1 August 2011, whether the report relates to a financial year that started before, on or after that date.
Board limits for public companies (sections 201N-201U)
From 1 July 2011, if a public company's constitution permits its directors to set a new maximum number of directors (board limit) below the maximum number allowed by the constitution, the Corporations Act will prohibit the directors from setting a board limit unless:
- a resolution approving the board limit is passed by the company in general meeting;
- the notice for that meeting states the resolution and sets out an intention to make it at the meeting; and
- the notice for that meeting is accompanied by an explanatory statement stating in clear concise terms the directors' reasons for proposing the resolution, and all other information known to the company or any of its directors that members reasonably require in order to be able to determine whether the resolution is in the company's best interests.
If the board limit resolution is passed, a notice setting out the text of the resolution must be lodged by the company within 14 days.
Importantly, if the board of your public company wishes to impose a board limit lower than the maximum set by its constitution, notice must be given not only in accordance with the content requirements of the new provisions, but also in accordance with the time requirements of section 249HA (ie 28 days).
Remuneration consultants and remuneration recommendations (sections 206K-206M)
Entry into a contract with a remuneration consultant that relates to obtaining a remuneration recommendation for one or more members of key management personnel of a listed company or other disclosing entity will require prior board or remuneration committee approval for contracts entered into on or after 1 July 2011.
For contracts entered into on or after 1 July 2011, a remuneration consultant will be required to:
- provide the recommendation only to non-executive directors or the remuneration committee (unless all directors are executive directors); and
- make a declaration, to be provided with the recommendation, whether the recommendation is free of undue influence.
Hedging arrangements (section 206J)
Restrictions on a member of key management personnel of a listed company, or a closely related party of such a member, entering into hedging arrangements to reduce their exposure to the risk element of remuneration, will apply to arrangements entered into on or after 1 July 2011, regardless of when the services were rendered to which the remuneration relates.
On 16 May 2011, Treasury released an Exposure Draftof proposed amendments to the Corporations Regulations that would provide a non-exhaustive list of arrangements considered (and not considered) to be a hedge. Consultation closed on 9 June 2011, and any submissions received in relation to the exposure draft have not yet been made public.
In the Exposure Draft, the following arrangements are deemed to be a hedge for the purposes of new section 206J:
- a put option on incentive remuneration; and
- an income protection insurance contract in which the insurable risk event affects the financial value of remuneration or equity or an equity-related instrument for the key management personnel.
In the Exposure Draft, the following arrangements are deemed not to be a hedge for the purposes of the section:
- an income protection insurance contract in which the insurable risk event is the death, incapacity or illness of any of the key management personnel; and
- a foreign currency risk arrangement.
The new provisions are complex and will require careful attention, particularly at the transitional stage. Minter Ellison can assist you with understanding the new provisions and planning how to address their requirements.