Explanatory Statement

Issued by the authority of the Parliamentary Secretary to the Treasurer

Corporations Amendment Regulations 2011 (No. 2)

Subject - Corporations Act 2001

Subsection 1364(1) of the Corporations Act 2001 (the Corporations Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Corporations Act to be prescribed by regulations, or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Corporations Act.

The Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 (the Executive Remuneration Act) amends the Corporations Act to, among other things, strengthen the non-binding vote on the remuneration report, increase transparency and accountability with respect to the use of remuneration consultants, and address conflicts of interest that exist with directors and executives voting their shares on remuneration resolutions.

The Regulations amend the Corporations Regulations 2001 (the Principal Regulations) to support the changes made by the Executive Remuneration Act.

Under the Executive Remuneration Act, key management personnel and their closely related parties are prohibited from hedging the key management personnel's incentive remuneration. Under the new law, an arrangement must not be entered into if it has the effect of limiting the key management personnel's exposure to risk relating to an element of the key management personnel's remuneration that is unvested, or is vested but remains subject to a holding lock.

The Principal Regulations are amended to set out a non-exhaustive list of the types of arrangements that would, and would not, be considered to be a 'hedge'. This would limit the key management personnel's exposure to risk.

Under the Executive Remuneration Act, a remuneration consultant is required to give their recommendation on remuneration (known as the remuneration recommendation) directly to either the directors of the company, or the remuneration committee, or both. They are prohibited from giving their recommendation to executive directors (unless the board consists only of executive directors).

The new measures improve disclosure and assist shareholders in assessing the independence of the advice that remuneration consultants provide to boards and their remuneration committees. It is important that directors are accountable to shareholders for ensuring that remuneration consultants are providing their advice free from undue influence from those directors to whom the advice might relate.

The Executive Remuneration Act defines a remuneration recommendation as a recommendation about how much the remuneration should be, and/or the elements of the remuneration package. Advice that can be characterised as legal, tax, actuarial, accounting or factual advice is expressly excluded from the definition. The new law also contains a regulation making power to prescribe a particular kind of recommendation, or advice or information as a remuneration recommendation. The Regulations amend the Principal Regulations to set out a recommendation, or advice or information that would not be a remuneration recommendation.

Details of the Regulations are set out in the Attachment .

Under the Corporations Agreement 2002 (the Corporations Agreement), the State and Territory Governments referred their constitutional powers with respect to corporate regulation to the Commonwealth. Under subclauses 506(1) and 507(1) of the Corporations Agreement, the Commonwealth is required to consult with State and Territory Ministers of the Ministerial Council for Corporations (the Council) before making a regulation under the national law. The Council has approved the amendments and agreed to a reduction of the period of public consultation to three weeks. The Regulations were publicly exposed for consultation between 16 May and 9 June 2011.

The Corporations Act specifies no conditions that need to be satisfied before the power to make the Regulations may be exercised.

The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.

The Regulations commenced on the commencement of the Executive Remuneration Act, on 1 July 2011.

ATTACHMENT

Details of the Corporations Amendment Regulations 2011 (No. 2)

Regulation 1 - Name of Regulations

This regulation provides that the title of the Regulations is the Corporations Amendment Regulations 2011 (No. 2).

Regulation 2 - Commencement

This regulation provides for the Regulations to commence on commencement of the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011.

Regulation 3 - Amendment of Corporations Regulations 2001

This regulation provides that the Corporations Regulations 2001 (the Principal Regulations) are amended as set out in Schedule 1.

Schedule - Amendments

Item [1] - After Part 1.1

Item [1] inserts a new regulation 1.2.01 into the Principal Regulations.

New regulation 1.2.01 prescribes a particular kind of recommendation, or advice, or information, that is not a remuneration recommendation, under paragraph 9B(2)(f) of the Act. This regulation incorporates internal remuneration advice provided by an employee of a company within the same consolidated entity as the listed entity.

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This exclusion clarifies that internally generated advice would not be captured under the Act's measures, which are intended to regulate the engagement of, and provision of advice by, external remuneration consultants.

Item [2] - After Part 2D.6

Item [2] inserts a new regulation 2D.7.01 into the Principal Regulations.

New subregulation 2D.7.01(1) sets out arrangements that are to be treated as an arrangement that has the effect of limiting the key management personnel's exposure to risk relating to an element of the key management personnel's incentive remuneration, as required under subsection 206J(1) of the Act. This subregulation incorporates three arrangements:

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A put option on incentive remuneration;

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A short position on shares that forms part of incentive remuneration; and

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An income protection insurance contract in which the insurable risk event affects the financial value of remuneration or equity or an equity-related instrument for the key management personnel.

These arrangements are to be treated 'hedging arrangements' as they would have the effect of limiting the key management personnel's exposure to risk, and can therefore undermine the purpose of the key management personnel's incentive remuneration, which is to tie remuneration with performance.

New subregulation 2D.7.01(2) sets out arrangements that are not to be treated as an arrangement that has the effect of limiting the key management personnel's exposure to risk relating to an element of the key management personnel's incentive remuneration, as required under subsection 206J(1) of the Act. This subregulation incorporates two arrangements:

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An income protection insurance contract in which the insurable risk event is the death, incapacity or illness of any of the key management personnel; and

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A foreign currency risk arrangement.

These arrangements are not to be treated as 'hedging arrangements' as they are primarily directed at managing types of risk other than the risks associated with incentive remuneration. Hence, they should not be captured under the requirements of subsection 206J(1) of the Act.

New subregulations 2D.7.01(3) to (5) define a short position pursuant to subregulation 2D.7.01(1). Subregulation (3) defines a short position as a position where the quantity of shares which a person has is less than the quantity the person is obliged to deliver. Subregulations (4) and (5) clarify circumstances around ownership of the shares and the obligation to deliver, as described in subregulation (3).