Termination payments are widely utilised as a means of rewarding Executives when their service is terminated for sound commercial reasons. The contractual provision of termination payments in these circumstances will often be a key ingredient in attracting top talent, encouraging Executives to take more risks, and ensuring a measure of objectivity in negotiations for mergers and takeovers. However, the termination benefits regime, which increased in complexity due to amendments in 2009 (see Egan Associate’s comment on the amendments here), can make it difficult for Boards to manage their obligations to shareholders when providing certain benefits to departing Executives.
As the 2015 AGM season draws to a close and a new year begins, Boards may be reflecting on recent shareholder feedback and re-evaluating their termination policies. In light of this, we have provided an overview of the current terminations benefits regime.
Summary of 2009 Amendments
The Corporations Amendment (Accountability on Termination Payments) Act 2009 (Cth) commenced on 24 November 2009. As a result of these amendments:
- Termination benefits exceeding one year’s base salary are subject to shareholder approval, whereas prior to the amendments termination benefits could reach up to seven times a recipient’s total annual remuneration before approval was required
- The scope of the regulation was expanded from to include Senior Executives and Key Management Personnel in addition to Directors
- The definition of a termination benefit was clarified and expanded
- Retirees that hold shares in the company can no longer participate in a shareholder vote on their termination benefit except when acting as a proxy
- The penalty provisions were strengthened to 180 penalty units (previously 25 units) for a natural person an 900 penalty units (previously 150 units) for a body corporate
How are termination payments defined under the Corporations Act?
Termination payments are referred to as “benefits” in the termination provisions of the Corporations Act, and include the following:
- A payment or other valuable consideration;
- A payment in lieu of notice;
- Accelerated or automatic vesting of share-based payments or entitlements on termination;
- An amount paid as a voluntary out-of-court settlement in relation to termination of employment;
- An amount paid pursuant to a restraint of trade clause;
- Real or personal property, or any interest therein;
- A pension other than a pension paid from a superannuation fund or annuity; and
- Superannuation payments in excess of legislative entitlements, other than salary sacrifice.
Excluded items and benefits exempt from shareholder approval
Not all payments provided to departing executives will be caught by Act and the following are specifically excluded:
- Deferred bonuses, including short and long term incentive awards, relating to performance up to the point of termination
- Genuine accrued benefits that are payable under law
- Payments required by law of a foreign country
- Payments from a prescribed superannuation fund due to death or incapacity
- Reasonable payments that are consistent with those made payable to all employees in the company purely based on the length of service and relating to genuine redundancy
- Payments from a defined benefits superannuation scheme that was in existence prior to 24 November 2009
- Genuine superannuation contributions paid by an employer or employee on or prior to 24 November 2009
For payments which do fall under the termination provisions, shareholder approval is not required under the Act if the benefit falls into one of the following categories and the amount does not exceed one year’s average base salary:
- A benefit given in relation to past services, such as superannuation or an accumulated lump sum
- A payment made as part of a restrictive covenant, restraint of trade clause or a non-compete clause;
- A benefit given as part consideration for the Executive taking up their position in office; and
- A genuine payment by way of damages for breach of contract.
However, it should be noted that ASX Listing Rule 10.19 provides that shareholder approval must be obtained for benefits provided to an officer that exceed 5% of the equity interests in the company.
Guidance on scope of termination provisions
Queensland Mining Corporation ltd v Howard Victor Renshaw & Ors (Renshaw) is a useful recent (2014) case that provides guidance on the amended termination provisions including when it is necessary to seek shareholder approval.
In this case it was held that the payments made to Queensland Mining Corporation Limited (QMLC) Executive Mr Renshaw had not been approved by shareholders and did not fall into any of the categories of exempt benefits. Mr Renshaw was ordered to repay the entire amount he received ($677,333).
In finding in favour of QMLC, the Court made the following observations:
- “Benefits” include amounts owing under contract
- The Corporations Act expressly provides that a person is taken to have given a benefit even if the person is obliged to provide the benefit under a pre-existing contract.
- Payments were not a genuine superannuation contribution
- It was proposed that one of the payments was intended to provide compensation for future superannuation entitlements that Mr Renshaw would have received under the service agreement and was therefore excluded.
- The court held that the exemption does not apply to future entitlements to superannuation contributions that have not yet accrued.
- Payments of tax liabilities are not exempt
- Amounts claimed to be for the purpose of withholding tax are not exempt as there are no exemptions in the Act or Regulations for payments intended to discharge such liabilities.
- Shareholder approval cannot be retrospective
- Mr Renshaw could not rely on the proposition (for the purpose of estoppel) that QMLC would obtain shareholder approval once the Settlement Deed had been signed and the payments had been made, as shareholder approval must be obtained before the payments are made.
In summary, if the termination payment falls under the definition of a “benefit” (and/or exceeds 5% of the company’s value if the company is listed) it will be necessary to seek shareholder approval unless the payment qualifies for exclusion under one of the specified exemptions, clarified by Renshaw. When shareholder approval is required, it must be obtained prior to the payment or provision of the benefit.