Key company law changes: proposed changes to paying dividends, and reporting on executive remuneration

The federal government is accepting submissions on proposed amendments to the Corporations Act 2001 (Cth) (Act) concerning:

  • a new dividend payment test; and
  • revised reporting requirements for executive pay disclosures.
 

What are the draft amendments?

The government recently released the Corporations Legislation Amendment (Remuneration Disclosures and Other Measures) Bill 2012 (Proposed Amendments) in exposure draft form. The Proposed Amendments contain a number of amendments to the Act, primarily about dividend payment requirements and executive pay disclosures.

The amendments to the dividends payments test follow the 2010 reforms to laws in this area (2010 Amendments), which are summarised here.

The further amendments to the executive pay reporting framework follow a number of recent changes in the area of executive pay, particularly the 'two-strikes' reforms of 2011 which have received extensive media coverage, and a recent CAMAC[1] investigation into existing remuneration reporting requirements.

The changes to the dividend rules will apply to all companies, whilst the remaining amendments will be of particular interest to directors and shareholders of listed companies.

Proposed changes to 'dividends test'

Current Law

Under the current test,[2] directors can pay a dividend if:

  • the company's assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient to pay the dividend;
  • the payment of the dividend is fair and reasonable to the company's shareholders as a whole; and
  • the payment of the dividend does not materially prejudice the company's ability to pay its creditors.

Proposed law

Under the Proposed Amendments, this test has been simplified so that directors may declare or pay a dividend if:

  • the company's assets exceed its liabilities immediately before the dividend is declared/paid and the excess is sufficient to pay the dividend; and
  • the directors reasonably believe that the company will be solvent immediately after the declaration/payment.

The Proposed Amendments also clarify some matters which have been of concern since the 2010 Amendments, including:

  • Making clear that the 'dividends test' only needs to be applied:
    • where the company declares a dividend, immediately before the dividend is declared; or
    • where the company resolves to pay a divided without declaring it, immediately before the dividend is paid.

    In contrast, under the current laws it was unclear exactly at what time companies were required to apply the 'dividends test' and, in particular, whether or not the test needed to be applied both at the time of declaration and at the time of payment.

  • Allowing companies, which are not otherwise required to prepare financial statements which accord with the accounting standards, to calculate assets and liabilities solely by reference to their financial records.

    In contrast, under the current laws all companies were required to calculate assets and liabilities in accordance with the accounting standards even if those accounting standards did not otherwise apply to that company.

If the Proposed Amendments are passed, the new 'dividends test' will apply to all dividends declared/paid after the bill receives royal assent.

Proposed changes to executive remuneration reporting framework

All listed companies must presently include a remuneration report for the company's Key Management Personnel[3] (KMP), within the annual directors' report.

Under the Proposed Amendments, the federal government aims to improve disclosures in the remuneration report as follows:

  • requiring a general description of the company's remuneration governance framework;
  • removing the requirement to list the value of lapsed options granted to KMP, requiring only that the number and year of lapsing be listed instead;
  • requiring increased disclosure of any termination and post-termination benefits paid to KMP, sometimes referred to as 'golden handshake' payments;
  • requiring any company which has materially misstated its accounts to disclose whether or not any remuneration has been or will be clawed back from a KMP;
  • requiring the disclosure of executive remuneration in 3 new categories according to when the remuneration is granted and actually paid.

What are the more significant proposals concerning executive remuneration?

Two of the most significant proposals are:

  • the new categories of remuneration outcomes; and
  • the requirement to disclose steps taken to 'clawback' overpaid remuneration.

Past, present and future pay

Currently, listed companies must disclose a number of details about the remuneration of each KMP in respect of each financial year. The Proposed Amendments include an added requirement that the remuneration be listed according to:

  • Past pay - amounts granted before the financial year and paid during the financial year;
  • Present pay - amounts granted and paid during the financial year; and
  • Future pay - amounts granted but not yet paid during the financial year.

The Explanatory Memorandum to the Proposed Amendments suggests that presenting information in this way will assist shareholders to clearly distinguish present and future pay from past pay that is received due to it being 'crystallised'.

The new categories of 'remuneration outcomes', however, have the potential to confuse shareholders as they may result in:

  • a double recording of pay granted in one year and paid in another (reported as future pay in the year it is granted and past pay in the year it is paid); and
  • less clarity in the link between a KMP's pay for a particular period and the KMP's or company's performance during that period.

If the Proposed Amendments are passed, these new categories of 'remuneration outcomes' will apply to remuneration reports prepared for financial years commencing 1 July 2013 onwards.

Clawback provisions

If a listed company becomes aware of a material misstatement in any of the company's financial statements for the previous 3 financial years, the proposed reform requires the company to disclose the following details in the remuneration report:

  • either, details of any alteration to the KMP's pay made or to be made as a result of the misstatement; or
  • an explanation of why no change will be made.

What is the context of these reforms - the 'two-strikes' rule

These amendments operate in the context of the 'two-strikes' rule introduced in 2011. The 'two-strikes' rule introduced a new process where shareholders dissatisfied with executive remuneration can seek to 'spill the board'. The rule works like this:

  • In year 1 - if shareholders cast 25% or more votes against the company's remuneration report, the company must respond to any comments at the next annual general meeting (AGM); and
  • In year 2 - if shareholders again cast 25% or more of votes the company's remuneration report, the company must put a 'spill resolution' to that same meeting; and
  • If shareholders cast more than 50% of eligible votes in favour of the 'spill resolution' a meeting must be held within 90 days to re-elect the board.[4]

The proposed reforms give more information to shareholders that they can use to make a decision whether to vote for or against a remuneration report.

Status of the Proposed Amendments

The Proposed Amendments are in draft form for public consultation and have not yet been introduced in parliament. Submissions on the Proposed Amendments close on 15 March 2013.

The Proposed Amendments and Explanatory Memorandum can be viewed here.

More information from Maddocks

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[1] Corporations and Markets Advisory Committee.

[2] Section 254T of the Act.

[3] Key Management Personnel is defined in the accounting standards as, 'those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity'.

[4] The directors required to stand for re-election at the 'spill meeting' are those that approved the remuneration report.