Senate passes Termination Payments Bill

On 16 November 2009, the Senate passed the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 (Bill).¹

The Senate in committee resolved not to insist on the last minute amendment which had been previously made by Independent Senator Nick Xenophon to include a ‘sunset clause’.

Senator Helen Coonan of the Opposition (which had initially supported the amendment) reported that the Shadow Minister Chris Pearce had taken legal and Treasury advice which made it clear that the sunset clause may have the unintended consequence of reducing certainty for companies. On that basis, the Opposition changed its position.

The Bill will now be put before the Governor General for royal assent (at which time it will become operative).

This article sets out a brief overview of the terms of the Bill as well as some suggestions to assist companies to deal with the Bill once it becomes operative.

Brief reminder of the terms of the Bill

Is the Bill retrospective?

The Bill will only apply to contracts of employment which are entered into, renewed, extended or varied after the date on which the Bill becomes operational.

When will shareholder approval be required to provide termination benefits?

In its current form, the Bill requires companies to obtain shareholder approval to provide termination benefits to:

1. directors or past directors of a company or any of its related bodies corporate in the three years prior to their retirement, and
2. for disclosing entities, employees who are key management personnel or have been key management personnel in the three years prior to the termination of their employment.

What is a termination benefit?

As currently drafted, the following benefits, if given in connection with the termination of an employee’s employment with the company, will be classified as ‘termination benefits’ under the Bill and its regulations (this list is not exhaustive):

Are there any exemptions to the requirement for shareholder approval?

While there are other exemptions, the two major exemptions to the requirement for shareholder approval are as follows:

1. where a benefit is given as ‘part consideration’ for the executive taking up the position as a director or key management person of the company and the benefits is equivalent to less than 12 months’ base salary, or
2. where a payment (ie cash) is made in respect of the executive’s ‘past services’ to the company and is equivalent to less than 12 months’ base salary.

Tips for dealing with the Bill

We set out below some suggestions that you may like to consider once the Bill becomes operative:

1. Review the terms of contracts
   
   Review the terms of the contracts of employment for employees who are directors or KMPs. Are the directors / KMPs entitled to termination benefits?
   
2. Are variations to the contracts likely?
   
   Ascertain whether it is likely that amendments will be made to any of the contracts referred to in paragraph (a) above or whether they contain provisions which contemplate that amendments will be made to key terms.
   
3. Do the contracts adequately protect the company?
   
   Check whether the contracts contain a provision which states that the company is not required to provide termination benefits to the employee if this provision would require shareholder approval.
   
4. Has shareholder approval already been obtained?
   
   Check whether prior shareholder approval (for example, for the issue of shares) is broad enough to cover approval for termination benefits.
   
5. Review incentive plan documentation
   
   Review the company’s incentive plan documentation to understand whether such documents contemplate the giving of termination benefits. Consider whether there is an alternative form of remuneration that would not be considered a termination benefit.

We consider that the above suggestions may also be useful in understanding whether shareholder approval will be necessary to provide termination benefits as well as whether there are any opportunities to restructure the form of remuneration to reduce the risk that shareholder approval will be required to provide various benefits if this is considered appropriate.

This article was written by Board & Executive Solutions team members Justine Turnbull, Partner and Michael Gonski, Solicitor, Sydney.

Endnotes

1. Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009

More information

For information regarding possible implications for your business, contact a member of the Board & Executive Solutions team.