Last week, the House of Representatives passed the Corporations Amendment (Improving Accountability on Termination Payments) Bill which - assuming it passes the Senate - will cap golden handshakes at one year's base salary unless shareholder approval is obtained.
The Bill is scheduled to be considered by the Senate tomorrow afternoon and could become law by the end of the week. The changes will have important consequences for many executives and directors (particularly of listed companies).
Implications for employers
- before making any changes to contracts, including changes to remuneration, consider what impact this could have on current termination/retirement arrangements (eg, shareholder approval may become necessary where that was not previously the case)
- payments in lieu of notice and accelerated or automatic vesting of share based payments on termination/retirement will generally require shareholder approval
- benefits received that contravene the new provisions must be immediately repaid by the recipient - this applies to the whole payment, not just to the amount above the one year base salary cap
- significant penalties can be imposed against both the employer and the recipient for breach of the legislation
- increased awareness of the golden handshake provisions is likely to lead to more scrutiny of termination/retirement arrangements
As you will recall, the golden handshake provisions of the Corporations Act 2001 (Cth) prohibit the giving of benefits to certain senior executives and directors in connection with their retirement from office (or employment) unless shareholders approve the benefits or they fall within one of a very limited number of exemptions.
Even if an exemption applies, shareholder approval will still be required for retirement benefits that exceed the relevant cap.
Under the current provisions, the relevant cap is up to seven times a person's annual remuneration (depending on their circumstances) so the reduction to one year's base salary is significant.
In our 5 May Alert, we outlined the proposed changes to the existing golden handshake provisions. Subsequently the draft legislation and regulations have changed significantly. These changes include:
- clarification on how 'base salary' is defined
- shareholder approval should be possible in advance, before a person's retirement (the government had proposed that approval would only be effective if given after the retirement)
the following will not be caught by the golden handshake provisions (i.e., do not constitute retirement benefits):
- a deferred bonus provided there is no accelerated or automatic vesting on retirement
- a reasonable payment that is made in accordance with a company policy applying to all employees as a result of genuine redundancy, having regard to the person's length of service (the Explanatory Memorandum indicates that two weeks per year of service would be regarded as reasonable)
- a payment required by a law of another country, and
- a payment from a prescribed superannuation fund due to death or incapacity.
- the following have been specifically characterised as retirement benefits and will be caught by the golden handshake provisions:
- payments made as part of restrictive covenants the value of which, when added to the value of all other retirement payments, exceed the one year base salary cap
- voluntary out of court settlements relating to the termination of employment
- a pension, except for a pension paid from a superannuation fund or annuity.
Other retirements benefits that will be prohibited without shareholder approval (regardless of their value) include payments in lieu of notice and automatic or accelerated vesting of share based payments on termination or retirement.
Very importantly, the new golden handshake provisions will apply to retirement from an office or employment held under an agreement:
- renewed or extended, or
- for which there is a variation of a condition,
after the legislation commences.
It is the third of these that is likely to cause the most concern. For example, the Explanatory Memorandum states that any change to remuneration will amount to a 'variation of a condition'. On this basis, even a modest increase in salary after the new law takes effect could mean the new provisions (including the one year's base salary cap) will apply. As a result, some retirement payments that do not currently need shareholder approval will be prohibited unless approval is obtained.
Benefits received that contravene the new provisions are held on trust by the recipient and must be immediately repaid. This applies to the whole payment or benefit, not just to the amount in excess of the one year base salary cap.