Not all handshakes are golden

Developments in limitations on executive termination payments

What you need to know

• The Corporations Act 2001 (Cth) (Corporations Act) places limitations on termination payments for persons holding "managerial or executive office". For listed companies, persons who hold "managerial or executive office" expressly include those persons who have had their details included in the directors' report for the previous financial year.
• The Federal Court has recently held that identifying those who hold "managerial or executive office" in a listed company is a question of fact, and that whether a person's details have been included in the directors' report for the listed company or not, is only one manner of determining this question. Persons who are appointed and resign from office within the same financial year will still come within the scope of the limitation.

What you need to do

• Employers should ensure that any termination benefit paid to individuals holding "managerial or executive office" (under section 200AA(1) of the Corporations Act) is below the statutory cap in the Corporations Act, or that shareholder approval has been sought for the termination payment. Obtaining pre-approval of benefits from shareholders at the Annual General Meeting may also be worth considering.

The limitation on "golden handshakes" for persons in "managerial or executive office" in listed companies, has been considered by the Federal Court in Discovery Africa Limited v Nichol [2015] FCA 1497. The decision potentially broadens the scope of persons who come within the limitation in the Corporations Act.

Limitation on "golden handshakes"

The Corporations Act imposes limitations on termination payments. These provisions were the subject of substantial amendments in 2009 (see our Corporate Law and Governance Update – November2009) which lowered the threshold so that all payments made to certain company directors and executives on their retirement that exceed one year's average base salary must be approved by shareholders.

The provisions apply to retirements from "managerial or executive office". For listed companies, the phrase "managerial or executive office" expressly includes persons whose details were included in the directors' report for the previous financial year (section 200AA(1)). This is the report required to be prepared under section 300A and published with the ASX.

For body corporates that are not required to prepare a directors' report under section 300A, the phrase "managerial or executive office" applies to those persons who hold an "office of director of the body corporate" or "any other office or position in connection with the management of the body corporate's affairs that is held by a person who also holds an office of director of the body corporate or a related body corporate" (section 200A(3)).

"The purpose [of the provisions]… is to bring transparency to, and shine daylight onto, transactions commonly called 'golden handshakes' that involve significant expenditure of the company's money in connection with the cessation of an employment or services relationship with a senior office holder or employee."

Full Court of the Federal Court – Renshaw v Queensland Mining Corporation Limited [2014] FCAFC 172

The recent decision of Discovery Africa Limited v Nichol has determined that the meaning of "managerial and executive office" for listed companies (section 200AA(1)) is not exclusive, and whether a person holds a "managerial or executive office" is a question of fact.

Discovery Africa v Nichol

In the context of a looming boardroom spill, two senior officers of Discovery Africa Limited (Discovery Africa), Mr Nichol and Mr Van Den Bergh, entered into Deeds of Release resulting in their resignation as directors of Discovery Africa, with each of them receiving significant payments.

Discovery Africa later commenced proceedings against Nichol and Van Den Bergh contending that the payments contravened the termination payment provisions of the Corporations Act. It alleged that the payments constituted benefits that were given in connection with retirement from managerial or executive office without member approval (in contravention of section 200B). Discovery Africa sought orders for these amounts to be held on trust for Discovery Africa (section 200J).

"Managerial or executive office"

Before the Federal Court, Van Den Bergh argued that he could not be considered as having held a "managerial or executive office" of Discovery Africa (which is a listed company). Van Den Bergh had held the position of an executive director for only 139 days and had resigned within the same financial year as his appointment. His details had not been included in the directors' report for Discovery Africa for the financial year immediately before the termination.

As noted, the relevant provision in the Corporation Act (section 200AA(1)) provides that for a listed company, a person will be considered as holding a managerial or executive office during the current financial year if the person's details were included in the directors' report for the previous financial year. On this basis, Van Den Bergh submitted that he had not held "managerial or executive office" (under section 200AA(1)) and therefore the termination payment provisions did not apply to the payment made to him.

The Court rejected the argument, holding that such a construction would lead to the absurd result that someone who held a managerial or executive office would not be regarded as holding such office during their first year in the position and until such time as their details were included in the directors' report for that year.

The Court held that being named in the directors' report was not determinative as to whether a person holds "managerial or executive office" within a listed company. The Court considered that the definition in section 200AA(1) was not "an exhaustive and exclusive provision for establishing whether a person in a listed company holds a managerial or executive office". The Court held that the question of whether a person held a "managerial or executive office" in a listed company was one of fact. Whether a person's details were included in the directors' report was just one means of establishing this fact.

The Court noted that this was consistent with other provisions within the termination payments regime of the Corporations Act, that were clearly intended to apply to officers who hold their position within a company for only part of a year (such as sections 200B and 200J). This was also reinforced by certain regulations made under the Corporations Act.

Payments "in connection with" termination

The Court dismissed a separate argument by Nichols that the payment to him was not "in connection with" his position as a director, because it was made under a Deed of Release, and paid to him through a corporate entity through which he was engaged by Discovery Africa.

The Court rejected the submission on the basis that the "legal form" was subsidiary to the "economic and commercial substance" of the payments. It held that the benefit paid to Nichol was caught by the limitation as it was made "in connection" with the termination of Nichol as a director. This was because the Deed of Release would not have been entered into, and the payment made, absent the resignation of Nichol.

The Court noted that this reflected the "policy objectives" of the provisions which are "to protect shareholders and creditors from unapproved golden-handshakes" and that it would be antithetical if the provisions could be avoided "by interposing other entities and a chain of interwoven agreements".

Payments in breach of limitation
The Court found against Nichols and Van Den Bergh, holding that neither had any reasonable prospects of defending a claim that the payments made to them were not subject to the limitation on termination payments. Both Nichol and Van Den Bergh have appealed the decision to a Full Court of the Federal Court. The appeals have not yet been heard.

Impact of Decision

• The decision raises questions as to the correct meaning of "managerial or executive office" for listed companies, under section 200AA(1), and the scope of persons covered by the termination payment provisions.
• If the decision of the Federal Court is upheld on appeal, listed companies will need to consider whether a termination payment to a senior officer of the company comes within the limitation (even if the senior officer's details were not included in the directors' remuneration report).