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(Improving Accountability on Termination Payments) Act 2009 (Cth)

On 23 November 2009, the Corporations Amendment (Improving Accountability on Termination Payments) Act 2009 (Cth) (the “Amending Act”) came into force in Australia. This legislation amends the Corporations Act 2001 (Cth) by placing strict limits on the amount of termination or 'golden handshake' payments that can be made to directors and other senior executives without shareholder approval. In doing so, the Amending Act aims to encourage responsible remuneration practices and curb excessive termination benefits being paid to executives.

Key Changes

The following key changes have been introduced by the Amending Act:

  • Termination benefits to company executives that exceed one year’s average base salary are subject to shareholder approval. Previously, a higher threshold of benefits, exceeding seven times the recipient’s total annual remuneration, was subject to shareholder approval.
  • ‘Base salary’ is calculated as the average annual base salary over the previous three years and includes cash salary, fees, non-monetary benefits and other short-term employee benefits. Specific rules apply where an executive has held office for less than three years.
  • Shareholder approval can only be obtained at a general meeting held after the executive’s departure from the company. This allows the shareholders an opportunity to assess termination payments in the context of the recipient’s actual performance. Previously, shareholder approval could be obtained at any time, including the time at which the contract was entered into.
  • The general meeting must not be called for the sole or dominant purpose of holding a vote on the relevant termination benefits, and notice of a general meeting to consider termination benefits must be accompanied by details of the proposed payment.
  • An executive must promptly repay any unauthorised termination benefits received in excess of the threshold.
  • The penalties in relation to unauthorised termination benefits have increased from $2,750 to $19,800 for individuals (with an option of up to six months’ imprisonment), and from $16,500 to $99,000 for corporations.

Operation of the Amending Act

The new laws will not apply retrospectively to existing contracts. Contracts that are entered into, renewed, varied or extended after 23 November 2009 will be affected by the amended provisions. Employers and employees should be aware that, although minor variations are unlikely to be caught, changes to a material term of the contract, such as a term relating to remuneration, will be sufficient to attract the operation of the Amending Act.

Impact of the Changes

The Amending Act has a significant impact on the termination benefit arrangements for directors and executives. If employers and employees wish to maintain their arrangements under existing contracts, they will need to exercise caution when extending or varying the material terms of their contracts.

In the case of new agreements, directors and executives may now wish to ‘front-load’ their contracts by negotiating for better pay and benefits during the course of their employment. They may also seek fixed term agreements in order to limit the company's right of termination and guarantee a certain level of income for a particular period.

All executive service agreements should now provide that termination benefits are subject to the Amending Act and may be conditional upon shareholder approval being obtained. It is to be expected that the reduced threshold will result in a greater number of circumstances where shareholder approval is required. However the increased penalties for breach make it important for companies to ensure adherence to the new provisions.

Please be advised that this article is not intended to be legal advice. All advice Berrigan Doube Lawyers provides is tailored to our client’s needs and therefore our advice is on a case-by-case basis after having consideration of our client’s circumstances.

If you would like more information on these changes, please contact Berrigan Doube Lawyers.