08/07/2024
Boards apply incentives to focus management on what they want achieved. This will often encompass a strategy to re-focus on the core business and divest subsidiaries, business units or assets that are no longer complementary, not considered a strategic fit, do not meet hurdle rates, or drag down returns. Boards might consider an incentive for some executives to divest these underperforming subsidiaries or assets.
To an executive, it can be very motivating to receive a piece of the pie in excess of the book value of an asset. It should pass any pub test (…well, any pub in, say, Woollahra).
But directors and executives beware. The Corporations Act deems it to be an offence if a benefit is given to an executive or manager in connection with the transfer of the whole or any part of the property of the company unless shareholders have first approved the giving of the benefit– see HERE for section 200C of the Corporations Act 2001 (Cth).
While companies typically seek shareholder approval for CEO equity grants, whether or not ASX LR 10.14 requires it, they do not generally seek approval for incentives for specific business divestments for “a person…..who holds, or has at any previous time held, a managerial or executive office in the company or a related body corporate…..”.
The maximum penalty for the offence of breaching this section is for an individual, 6 months imprisonment, 180 penalty units, or both; and for a body corporate 1,800 penalty units (a Commonwealth penalty unit is currently $313).
Given the penalties, surely section 200C was not invented to prevent more productive applications of capital. So, what is the purpose of section 200C?
The explanatory memorandum for the introduction of the Provisions of the Corporations Amendment (Repayment of Directors’ Bonuses) Bill 2002 (see HERE) states that the purposes of this section were:
- To permit liquidators to reclaim unreasonable payments made to directors by companies prior to a liquidation; and
- To assist in the recovery of funds, assets and other property to companies in liquidation where payments or transfers of property to directors are unreasonable.
Does this mean ordinary incentives as described above are ok? Not necessarily. The Senate Committee that reviewed the Bill prior to its introduction heard many of the arguments against its potentially wide interpretation. Yet the Committee recommended the Bill proceed and that it apply to senior executives who are not directors as well as directors.
It is worth remembering that while the context of the section was intended for companies going into liquidation, it remains sufficiently wide for regulatory action in the event of incentives being paid without shareholder approval that are subsequently seen to have been inappropriate in the circumstances.
Other than some very specific demerger proposals, there have not been many resolutions seeking approval for management incentives directly related to the value derived from asset rationalisation. Perhaps there should be a few more?
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