FOCUS POINT: TWO STRIKES RULE COULD SPELL A SPILL

THE upcoming round of Annual General Meetings (AGM’s) for ASX-listed companies will be the first in which the votes on the remuneration reports are subject to the new ‘two-strikes’ rule. The rule gives shareholders the ability to vote against the reports and ultimately the ability to spill the entire board, requiring all directors to be re-elected.

Amendments to the Corporations Act 2001 (Cth)

On 1 July 2011, the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 (Cth) (Act) came into effect giving shareholders the power to spill a company’s board if unsatisfied with the remuneration reports (Report) delivered at two consecutive AGM’s.

What has changed?

Prior to the amendments of the Act, the votes cast by shareholders at an AGM on a Report were non-binding. This has now changed to give a company ‘two strikes’ before a company must hold a ‘spill meeting’.

The first strike

The first strike occurs where at an AGM (an earlier AGM), 25 per cent of the votes cast on a resolution to adopt a report are against the adoption of it (the 25 per cent threshold). The important distinction here is that the threshold is 25 per cent of the votes cast on a resolution not 25 per cent of the votes entitled to be cast. This is a lower threshold to be satisfied, and also lower than an ordinary threshold required to pass an ordinary resolution.

The second strike

If, at the next AGM after the first strike occurs, the 25 per cent threshold occurs again, then a vote is to be put to the AGM for a resolution that:

• a meeting (spill meeting) of the company’s members is to be held within 90 days;
• all of the company’s directors, aside from the managing director, who were directors at the time of the Later AGM (relevant directors) will cease to hold office immediately before the end of the Spill Meeting; and
• resolutions to appoint persons to offices that will be vacated before the end of the Spill Meeting will be put to vote at the Spill Meeting.

Spill Meeting

• the Spill Meeting must be held within 90 days or an offence will have been committed;
• all of the Relevant Directors will cease to hold office immediately before the end of the Spill Meeting and all of the directors appointed at the Spill Meeting will commence to hold office at the end of the Spill Meeting. Re-appointment will not affect a directors term of office; and
• no fewer than three directors may be left after a Spill Meeting.

If less than three directors would be left, then enough directors to make up three will be deemed to be appointed. These are the directors who possess the highest percentage of votes favouring their appointment.

Other matters for consideration

• the amount of notice required for a meeting under s 249HA of the Corporations Act 2001 (Cth) and the amount of notice required by a company’s constitution to appoint a director must be complied with before the Spill Meeting takes place;
• key management personnel or their close related parties must not vote on the resolutions for Report or on the spill meeting;
• a proxy of a key management personnel may only vote in certain circumstances; and
• if at an AGM where the 25% Threshold occurs, comments were made on the Report, the company’s subsequent Report must contain either an explanation of the board’s proposed action in response or the board’s reasons for inaction.

Conclusion

These amendments mean that boards may have to change the way they determine executive remuneration, create board succession plans and their constitution and their preparation for AGM’s. It will be interesting to see how shareholders vote at the upcoming AGMs, bearing in mind these changes. There is certainly the possibility that shareholders may in fact vote more favourably on the Reports than otherwise, given the potential disruption the two strikes could cause for a company. However, it will only be next year that companies could be subject to the possibility of a second strike (depending on the votes at AGMs this year), and how shareholders vote in that situation could vary again.

There is also the possibility that organisations will find it harder to recruit an experienced and skilled director when knowing that any attempt at competitive remuneration for directors may be heavily scrutinised by its shareholders. Further, these skilled directors may be driven to look off-shore for more competitive remuneration packages that won’t potentially cost them their position on a board or further, organisations may also go off-shore in order to obtain the best directors for their organisations. It may however take a while for the full impacts of the amendments to be realised and will depend on how shareholders use this power in practice.