Publications / Corporate Advisory
In February 2011 we released our focus article, ‘Executive remuneration – window dressing or glass shattering’. This article highlighted a series of executive remuneration reforms that were pending or had come into effect. The most recent of these is the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 (Act), which came into effect on 1 July 2011.
This Act will have a significant impact on meeting procedures for listed companies in the upcoming AGM season. A brief summary of the main changes under the Act and some practical points to consider are detailed below.
Two strikes test
There will be a ‘two-strikes’ test regarding approval of listed companies’ remuneration reports, which are contained in the Annual Report. The ‘first strike’ will occur where the company’s remuneration report receives a ‘no’ vote by 25% or more shareholders entitled to vote. The market had in some cases, assumed the relevant calculation of votes was on the total number of voting shares. In fact, the legislation applies the lower threshold of 25% of those voting. This also raises arguments about whether a poll must be called. To date, even large companies have taken differing approaches and specific advice should be sought.
Where there has been a ‘no’ vote of the requisite percentage on a company’s remuneration report, the board must provide an explanation of its proposed action in the subsequent Directors’ Report (forming part of the Annual Report). Where no action is proposed, the board’s reasons for its inaction must be stated. If a remuneration consultant has provided a remuneration recommendation for any of the key management personnel, details regarding the recommendation must also be included in the Directors’ Report.
The ‘second strike’ will occur if the remuneration report receives a ‘no’ vote of 25% or more shareholders voting at the following AGM. Where this occurs there will be a ‘spill resolution’ at the same AGM to decide if a ‘spill meeting’ should be held, at which the directors in office will stand for re-election.
Only those directors in office at the AGM (except the managing director) where the ‘second strike’ occurred will cease to hold office immediately prior to the ‘spill meeting’. The resolutions to appoint persons to these positions will then be put to shareholder vote at the spill meeting.
The spill meeting need not be held if none of the directors being spilled remain in office at the end of the 90 day period.
Remuneration consultants must now be approved by the company directors before the company formally engages the consultant.
The remuneration consultant must only give remuneration recommendations to the remuneration committee or the non-executive directors of the company. These recommendations must not be given to executive directors, unless all directors of the company are executive directors.
Voting on remuneration matters
‘Key management personnel’ (KMP) and their closely related parties are not able to vote on the remuneration report where they are shareholders of the company and would otherwise be entitled to vote.
KMP and their closely related parties are also precluded from voting any undirected proxies in relation to any resolutions relating to remuneration matters (discussed further below).
Hedging of incentive remuneration
The Act prevents KMP or their closely related parties from hedging a portion of their remuneration that has not vested, or has vested but remains subject to a holding lock. Contravention of this section is a criminal offence.
‘No vacancy’ rule
Where a company’s constitution provides that the maximum number of directors is a specified number, shareholder approval is required to enable the board to declare there is ‘no vacancy’ by setting a binding limit lower than the number specified in the constitution. Persons can be appointed as a director by other directors between general meetings and any appointment will have to be confirmed at the next AGM.
New provisions require all directed proxies to be cast, prohibiting proxy holders from ‘cherry picking’ the resolutions they vote on. This is a change to the previous position and is arguably disadvantageous, as it removes the discretion of a proxy to abstain from voting where the proxy has the benefit of having heard proceedings at the meeting which may lead them to conclude a vote should not be made in favour of a resolution. In circumstances where a proxy holder abstains from voting a directed proxy, the chairman of the meeting becomes the proxy for the purpose of voting on that resolution as directed.
KMP and their closely related parties must not vote undirected proxies on any resolutions directly or indirectly connected with the remuneration of the KMP, unless the proxy is the chairman and they have been expressly authorised to exercise the proxy.
This is a broad restriction which applies to the ‘spill resolution’, resolutions fixing the remuneration of directors and resolutions approving related party benefits. Accordingly, the wording of the Act casts a wide net and companies will need to be particularly cognisant of this change in the AGM season.
There has been some confusion regarding the chairman’s ability to vote undirected proxies on the remuneration report resolution. This is discussed in further detail below.
Remuneration disclosures will be required for the KMP of the consolidated entity. This aligns the test to Accounting Standards, and removes the previous differently expressed requirement to disclose the remuneration of the five highest paid executives.
The Act gives rise to several practical difficulties that have come into focus as we move into the first AGM season since the amendments were effected.
The Act, as enacted, created some confusion as to whether the chairman is able to vote undirected proxies on the remuneration report resolution.
To ameliorate this, Parliament released the Consumer Credit and Corporations Amendment (Enhancements) Bill 2011 (Bill) on 21 September 2011. The Bill (amongst other things) clarifies the position under the Act that a chairman of a meeting who is also a KMP or a closely related party of a KMP is allowed to vote undirected proxies on the remuneration report resolution where the shareholder provides express authorisation for the chairman to exercise the proxy.
The Bill clarifies Parliament’s intention but will not come into effect until it receives Royal Assent in the Spring Parliamentary sittings, well after the current AGM season. In the interim, ASIC has provided guidance and has made the four following suggestions to companies:
- option 1 - make no change to the company’s usual proxy form and ensure that the chairman will not vote any undirected proxies on the remuneration report resolution
- option 2 - change the company’s proxy form so there are more directed proxies, which can be counted in the vote on the remuneration report resolution
- option 3 - suggest that shareholders consider nominating a proxy other than a member of the company’s KMP or a closely related party for the purposes of the remuneration report resolution, or
- option 4 - apply to ASIC for relief to allow the chairman to vote certain undirected proxies on remuneration report resolutions in the specified scenarios, including appointment of a different person (not a KMP) to chair the meeting.
With the first of the AGMs for this season underway it has become clear that option 2 has been the preferred option with approximately two thirds of companies taking this approach. This option requires clear wording in the notice of meeting and the proxy form stating that the shareholder must tick either the ‘for’, ‘against’ or ‘abstain’ box if they do not want to give the chairman a directed proxy. If the shareholder ticks the separate checkbox, they direct the chairman to cast the vote in line with the chairman’s stated voting intention. If the checkbox is not ticked but the chairman has been appointed as the proxy, the chairman will be precluded from voting the undirected votes.
This approach is consistent with the recently released Bill that requires there to be express authorisation for the chairman to exercise the proxy. ASIC’s guidance requires that the chairman’s voting intention be disclosed in the notice of meeting and the proxy form. We suggest that companies liaise with their share registries to assist them in the preparation of the proxy forms.
ASIC guidance had been misconstrued by some market participants as requiring case by case relief to use the ‘tick box’ format referred to in option 2 above. ASIC has clarified that this interpretation is not correct and they will not entertain such applications, unless they go to the matters in option 4.
New requirements to report on shareholder comments (in particular those which are not adverse) creates practical difficulties and may involve excessive detail.
If a ‘first strike’ is made the materials for the second AGM will be required to contemplate the possibility that a ‘spill resolution’ may need to be put to the meeting. Some companies are choosing to outline the consequences now to inform shareholders of the adverse consequences of a no vote on the remuneration report resolution and discourage minor protest votes. Other companies take the view this is either confusing or may be construed as too defensive.
The test allows external candidates to stand for election at a spill meeting. This may lead to voting against the remuneration report as a destabilising tactic rather than a genuine vote on the remuneration report itself.
The changes have significantly added to the complexity of meeting documentation (contrary to the principles of being ‘clear, concise and effective’), as well as the practical administration of meetings. The future changes set out in the Bill are expected to clarify the ability of the chairman to vote undirected proxies where the shareholder has given express authorisation. In the meantime, companies are incurring significant time and cost responding to these changes, many of which do not yield tangible benefits to shareholders or which may have unintended consequences.
Before the AGM
Directors and Board members need to ensure they are familiar with the relevant legislation and amendments as set out in the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 as well as the proposed changes outlined in the Consumer Credit and Corporations Amendment (Enhancements) Bill 2011 released on 21 September 2011.
Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.