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Rules for termination benefits to directors and executives

Executive in meeting room

Written by Victoria-Jane Otavski, Principal and Lesley Chen, Lawyer

Did you know that you may need to seek shareholder approval for certain benefits paid to an officer or senior executive on termination of their employment or engagement?

Division 2 of Part 2D.2 of the Corporations Act sets out the key provisions regulating the payment of termination benefits to company directors and executives and the exceptions to the need for shareholder approval in certain instances.

Termination benefits are broadly defined under the Corporations Act to include: any payment or other valuable consideration, superannuation payments in excess of legislative requirements, pension, real or personal property, accelerated or automatic vesting of share-based payments or entitlements. It also extends to payments made to the officer’s and/or executive’s spouse, certain relatives, and their associates.

Not all payments or benefits are captured by this broad definition and specifically, it does not include: deferred bonuses, genuine accrued benefits that are payable under law, payments from a prescribed superannuation fund due to death or incapacity, genuine payment by way of damages for breach of contract or payments required by law of a foreign country.

The requirement for shareholder approval in respect of such termination benefits applies to payments to those who hold or previously have held a managerial or executive position.

However, an exemption exists for the payment or provision of certain termination benefits where the value of all termination benefits does not exceed a prescribed monetary cap. This monetary cap is dependent on the length of time in which they held the managerial or executive position. For example, the monetary cap for a person who has held a managerial or executive position for one year is equivalent to the executive’s average ‘base salary’ over one year.

ASX listed companies must comply with their obligations under the ASX Listing Rules which outlines that termination benefits cannot become payable to an “officer” due to a change in the shareholding or control of the company (ASX Listing Rule 10.18). Shareholder approval will also be required under ASX Listing Rule 10.19 if the value of all termination benefits payable to officers will exceed 5% of the equity interests in the company.

If shareholder approval is required under section 200B of the Corporations Act, this will in turn require:

  • the details of the benefit set out in the notice of general meeting; and
  • an ordinary resolution being passed at a general meeting, with neither the executive (or if applicable, any associates) voting on the resolution.

Unauthorised termination benefits are debts owed to the company and must be repaid immediately by the terminated officer or executive.  In addition, civil penalties apply to individuals who breach the relevant terms of the act and can be to a maximum of $19,800 and $99,000 for corporations.

Please contact Victoria-Jane Otavski (victoria.jane@automicgroup.com.au) of Automic Legal for any further information.