Jurisdiction - Australia
Labour & Employment
Herbert Smith Freehills
Australia – Proposed Reforms To Executive Pay Disclosures And Dividend Laws.

5 January, 2012


Legal News & Analysis – Asia Pacific – Australia – Labour & Employment


On Friday 14 December, Treasury released for consultation an Exposure Draft of the Corporations Legislation Amendment (Remuneration and Other Measures) Bill 2012 and accompanying Explanatory Memorandum. Submissions on the Exposure Draft are open until Friday 15 March 2013.

Click here to access to the Explanatory Memorandum and Exposure Draft, and here to access the Treasury’s media release.

Overview of changes

This Bill makes a number of amendments to the Corporations Act 2001 (Cth) (Act) in two key areas – remuneration disclosure requirements and the test for dividend payments.

The changes to the dividend payments test resolve some of the confusion flowing from the previous 2010 reforms in this area – although they do not resolve the issues regarding tax treatment. We also have significant concerns regarding the proposed executive remuneration disclosure reforms. According to Treasury these amendments are aimed at enhancing executive remuneration disclosures and reducing the regulatory burden on companies. In our view the reforms are unlikely to achieve either of these objectives. In particular, the government could have taken the opportunity to meaningfully streamline the content of the remuneration report, and to clarify how the requirements relating to options apply in respect of performance rights and other forms of equity incentives. 

Dividend changes

The Exposure Draft effectively confirms that dividends cannot be paid out of capital without shareholder approval, in line with the existing provisions of Part 2J.2 of the Act. It also recognises that most companies resolve to pay dividends rather than declaring them, and confirms that for those companies the relevant time at which the test must be applied is immediately before payment of the dividend. Where companies declare dividends the test need only be applied immediately before the dividend is declared.

The current three limb test under section 254T will be replaced by a simpler, two-limb test. Assets must exceed liabilities and the directors must be satisfied that the dividend will not compromise the company’s solvency. The Explanatory Memorandum confirms that the new dividends test is not designed to change taxation arrangements for dividends.

The changes are unlikely to result in any significant changes in practice for most companies, who had already been adopting a conservative interpretation of the existing provisions, particularly in light of comments made by the ATO in respect of dividend franking.

The proposed changes to the dividend laws are intended to take effect as soon as the Bill receives royal assent, however transitional provisions apply the current law to dividends declared before the Bill receives royal assent but paid after that time.

Remuneration disclosures

In short, there is no reduction in the reporting burden on companies, but a change in what will be required to be reported. While two minor reporting requirements will be removed from the Act, a handful of new requirements will be inserted in their place. The remuneration disclosure changes are intended to take effect for financial years commencing on or after 1 July 2013 (and so will apply for remuneration reports released in the second half of 2014).

(a) Remuneration outcomes disclosures

New requirements to disclose remuneration outcomes are likely to be the most problematic of the changes proposed. Remuneration outcomes for each member of the KMP will need to be disclosed in the following categories (in addition to the existing statutory disclosures):

  • Past pay – amounts granted before the start of the year and paid during the year
  • Present pay – amounts granted and paid during the year
  • Future pay – amounts granted but not yet paid during the year

No guidance is given as to the meaning of the term ‘paid’, however the Explanatory Memorandum suggests that the intention is to capture amounts that have crystallised. This is likely to result in a variety of approaches to disclosure of equity grants that form a significant proportion of remuneration for CEOs and senior executives of ASX listed companies.

As currently framed, the proposed new requirements are more likely to create confusion than clarity. The requirement to disclose past pay, present pay and future pay will result in the same remuneration being double counted in successive remuneration reports. Similarly, STI bonuses that are earned in respect of the financial year being reported on, but not paid until after the finalisation of accounts, will be disclosed as future year pay. This is counterintuitive and will result in the loss of the current links between performance and pay in respect of the year being reported on. For companies that already disclose ‘actual remuneration’ figures in their remuneration reports, these voluntary disclosures are likely to be superseded by the new outcomes table. This is unfortunate given the actual remuneration tables are typically designed by those within the company to convey the most accurate picture of the actual take home pay of executives in respect of the financial year being reported on.

(b) Clawback disclosures

The clawback changes have been introduced in the form of ‘if not, why not’ requirements, as foreshadowed by the government earlier this year. These are far less intrusive than what they could have been, and only apply in the event of a material misstatement or omission in the company’s accounts in the previous 3 financial years. Where an executive has been overpaid as a result of the material misstatement, the company will need to disclose whether a clawback has been applied, and if not, explain why no clawback has been applied.  Discretion as to whether clawback measures are introduced, and the form such measures will take, remains with the directors. Most large listed companies already make disclosures around their ability to clawback bonuses and their remuneration governance arrangements in the remuneration report, so the main impact of these changes will be to bring the smaller listed companies into line with some of the ‘best practices’ already in place among larger listed companies.

(c) Remuneration governance disclosures

The remuneration report will now need to include a description of the company’s remuneration governance framework, or a cross-reference to the location of that information in the annual report (e.g. the corporate governance statement). Remuneration governance framework is not defined (to give companies flexibility as to how they interpret it), however the Explanatory Memorandum suggests that this should cover the role, membership and experience of the remuneration committee and how conflicts of interest are managed.

(d) Termination benefits disclosures

The Exposure Draft proposes expanded disclosure around termination benefits paid to KMP, as well as post termination arrangements such as consultancy agreements and paid restraints. The applicable definition of ‘benefit’ will be linked to the provisions in sections 200A-J of the Act.  Ex gratia payments and damages for breach of contract will require specific disclosure, as will statutory entitlements paid out on termination. The expanded requirements to disclose benefits on termination will help flush out instances where outgoing executives receive paid restraints or enter into consultancy arrangements post-termination. As many companies already voluntarily disclose such arrangements, we would not expect this to be a significant concern for companies.

(e) Changes to disclosure of lapsed options

Requirements to disclose the value of lapsed options and the proportion of remuneration consisting of options have been removed and replaced with new requirements to disclose the number of options lapsed and the year in which they were granted.


For further information, please contact:

Carolyn  Pugsley, Partner, Herbert Smith Freehills


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