Guidelines for CEO termination and change in control payments

Termination payments for Australian executives have featured extensively in the news over the past month.  But, on the whole, Australian termination payments are modest in comparison to other parts of the developed world, and shareholders of ASX listed companies are well served with regulatory and governance checks. 

Typical CEO termination provisions comprise:

• 12 months’ fixed remuneration
• LTI vesting (increasingly, and especially where there are multiple LTI grants outstanding, this is pro rated on service (i.e. 2/3 of a grant may vest if there is a year to go in a 3 year LTI plan) and also subject to performance up to the date of termination).  
• Bonus to the extent that objectives have been met.  This is sometimes pro-rated with service, and sometimes paid out at target or on an average of prior year STI outcomes 
• Accrued statutory entitlements (annual leave, long service leave, superannuation)

Termination payouts cannot be made or increased as a result of a change in control (under ASX Listing Rule 10.18) but will often trigger early vesting of equity plan/LTI entitlements.  MD/CEO contracts also commonly include a provision allowing the executive to resign on maximum termination benefits if there is a substantial diminution in their role, responsibility or status, which can occur after a change in control. 

The Corporations Act (section 200B) generally requires shareholders to approve retirement benefits for directors (including executive directors) in accordance with section 200E, but exemptions are provided in specified circumstances under sections 200F and 200G.  Under section 200F, a benefit paid by way of damages for breach of contract or as part of the consideration for accepting the office under an agreement made before the appointment will not require shareholder approval if the amount of the benefit (when added to any other payments made or payable in relation to the retirement) does not exceed an amount that is up to 7 times the person’s average total remuneration over the prior 3 years. Shareholder approval will also be required (under ASX Listing Rule 10.19) if total termination payments to officers exceed 5% of issued capital.

The nature of the termination payment must be reasonable, if only to comply with section 211 of the Corporations Act.  Ideally, if the board has put in place a well-crafted incentive plan, the CEO should be reasonably neutral when it comes to a change in control situation.  This will assist the board in determining if a change in control is in the best interests of shareholders. 

Generally, there should be no requirement for additional payments beyond traditional and accepted practice as outlined above.  This does not mean there should be no exceptions.  There will be.  That is why shareholders have the opportunity to vote on payments in excess of the limits set under sections 200F and 200G. 

Besides this they can express the extent of their satisfaction with their vote on the remuneration report.  If the payment is indeed reasonable in the circumstances and these circumstances are adequately disclosed and explained there will be an affirmative vote.  If particularly egregious there will be a majority ‘no’ vote.  Beyond this, of course, is the shareholders’ right to vote a director off the board if they consider them incompetent in material matters, which may include executive director termination payments.  So, on the whole, there are quite good safeguards in place.

© Guerdon Associates 2024
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