Explanatory Memorandum
Circulated by the Authority of the Parliamentary Secretary to the Treasurer, the Hon David Bradbury MPChapter 3 - Prohibiting KMP from voting on remuneration matters
Context of amendments
3.1 Section 250R of the Corporations Act provides that a listed company must put its remuneration report to a non-binding shareholder vote at the AGM.
3.2 Currently, the Corporations Act does not prohibit directors or executives, whose remuneration is disclosed in the remuneration report from participating in the non-binding vote on remuneration if they hold shares in the company. This includes the voting of their shares and any undirected proxies which may have been nominated to them.
3.3 While section 224 of the Corporations Act prohibits related parties and their associates from casting a vote on related party transactions, it does not extend the prohibition to the non-binding vote contained in section 250R. Section 195 also provides that a director must not vote on a matter involving material personal interests, although an exception exists in relation to the director's remuneration.
3.4 The PC inquiry concluded that there is a conflict of interest that exists with directors and executives voting on their own remuneration arrangements. As these directors and executives have an interest in approving their own remuneration arrangements, allowing them to participate in the non-binding vote may result in a higher approval vote on the remuneration report than might otherwise be achieved. This could distort the outcome of the non-binding vote and diminish its effectiveness as a feedback mechanism to the board.
Summary of new law
3.5 Under the new law, KMP and their closely related parties will be prohibited from participating in the non-binding shareholder vote on remuneration and on the spill resolution. In addition, KMP and their closely related parties will be prohibited from voting undirected proxies on all remuneration related resolutions.
3.6 In order to ensure that shareholders continue to have the right to empower the chair of the meeting to vote undirected proxies on their behalf, a KMP or their closely related party will be able to vote undirected proxies on remuneration related resolutions if they are the chair of the meeting at which the resolution is voted on and the shareholder expressly provides informed consent for the chair to exercise the proxy even if the resolution is connected with the remuneration of a member of the KMP.
Comparison of key features of new law and current law
| New law | Current law |
| KMP and their closely related parties that hold shares will be prohibited from voting their shares in the non-binding vote and the spill resolution.
KMP and their closely related parties will only be able to vote undirected proxies on remuneration related resolutions when they are the chair of the meeting and the shareholder has expressly given their informed consent for the chair to exercise the proxy. |
KMP and their closely related parties can participate in the non-binding shareholder vote on remuneration, including by exercising undirected proxies. |
Detailed explanation of new law
Voting of own shares
3.7 Under the new law, a KMP, their closely related party or any person acting on behalf of the KMP or their closely related party, must not cast a vote in the non-binding resolution on the remuneration report or on the resolution on the spill meeting. [Schedule, Items 12 and 13, subsections 250R(4) and 250V(2)]
3.8 An exception to this prohibition exists where the person is exercising a directed proxy (which specifies how the proxy is to vote on the proposed resolution) on behalf of someone other than the KMP or the closely related party. [Schedule 1, Item 12, subsection 250R(5)]
3.9 The Bill provides the Australian Securities and Investments Committee (ASIC) with the ability to provide relief from the prohibition, where it would not cause unfair prejudice to the interests of any shareholder of the listed company [Schedule 1, Item 12, subsection 250R(6)] . This is intended to provide flexibility in cases where the prohibition would lead to harsh or unintended outcomes. The written declaration made by ASIC is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003 .
3.10 A vote cast in contravention of the prohibition does not affect the validity of the resolution. It is, however, taken to have not been cast and will not be counted in determining whether the resolution passed. [Schedule 1, Item 12, subsection 250R(8)]
Voting of undirected proxies
3.11 Under the new law, a KMP or their closely related party that is appointed as a proxy must not exercise the proxy on a resolution connected directly or indirectly with the remuneration of a KMP if the proxy is undirected (that is, if the appointment does not specify the way the proxy is to vote on the resolution). [Schedule 1, Item 10, subsection 250BD(1)]
3.12 However, the prohibition in subsection 250BD(1) will not apply if the person is the chair of the meeting at which the resolution is voted on and the shareholder expressly provides informed consent for the chair to exercise the proxy even if the resolution is connected, directly or indirectly, with the remuneration of a member of the KMP of the company or consolidated entity [Schedule 1, Item 10, Subsection 250BD(2)] . Informed consent would be obtained where the appointment expressly authorises the chair to exercise the proxy even if the resolution is connected directly or indirectly with the KMP's remuneration. Such authorisation could be obtained, for example, by completing a proxy form containing the statements set out in ASX Listing Rule 14.2.3B.
3.13 The Bill provides ASIC with the ability to provide relief from the prohibition, where it would not cause unfair prejudice to the interests of any shareholder of the company [Schedule 1, Item 10, subsection 250BD(3)] . This is intended to provide flexibility in cases where the prohibition would lead to harsh or unintended outcomes. The written declaration made by ASIC is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003 .
3.14 A vote cast in contravention of the prohibition does not affect the validity of the resolution. It is, however, taken to have not been cast and will not be counted in determining whether the resolution passed. [Schedule 1, Item 10, subsection 250BD(4)]
Application and transitional provisions
3.15 The proposed prohibition on KMP (and their closely related parties) voting in the non-binding vote applies in relation to voting on or after 1 July 2011, irrespective of whether the remuneration report concerned relates to a financial year starting before, on or after 1 July 2011.
3.16 The proposed prohibition on KMP (and their closely related parties) voting undirected proxies in remuneration related resolutions applies in relation to voting on or after 1 July 2011, irrespective of whether the matter that is the subject of the resolution relates to a time before, on or after 1 July 2011.