New capped executive termination pay limits now law

Our November 2009 newsletter reported that the Australian Senate (at the instigation of Senator Xenophon) had amended the government’s proposed changes to the Corporations Act termination payments provisions.  The amendment would have imposed a three year “sunset” period on the changes and effectively rendered the legislation unworkable after that time.

However, on 16 November, the Minister for Financial Services, Superannuation & Corporate Law, Mr Bowen, announced that the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 had passed through the Senate after the dropping of the proposed amendment.  The legislation and accompanying regulations received Royal Assent on 23 November and took effect the following day.

The implications of the new legislation were explained in previous newsletters, but in summary, the maximum termination benefit that can be paid to key management personnel without shareholder approval has been reduced from a maximum of seven years’ total remuneration to one year’s base salary.  There is a significant degree of complexity associated with determining which benefits are to be included or excluded when assessing compliance with the new cap.  For example, although the regulations prescribe that a deferred bonus (amongst other things) is not a benefit, they require shareholder approval for the accelerated or automatic vesting of share-based payments including deferred bonuses.

Although existing contracts are not affected by the changes, it has been suggested that relatively minor variations to employment terms could see the existing contract arrangements captured under the new laws.  We have already seen examples of companies seeking “upfront” approval of amounts in excess of the new cap in order to provide a degree of certainty to executives, and would expect to see that practice escalate in the future.

© Guerdon Associates 2024
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