Draft legislation aimed at regulating executive termination payments is likely to cause confusion and added complexity in areas such as employment contracts, superannuation payments and tax, according to Mallesons Stephen Jaques partner Diana Nicholson.
Nicholson said businesses will already be making changes to their termination agreements to avoid the hefty new penalties - including fines of up to of $99,000 for corporations - despite the significant areas of uncertainty in the draft legislation.
"I think they [businesses] will be starting to change their agreements in terms of a go-forward position to try and make sure that they don't set themselves up for any breaches under the legislation as it stands, but they'll certainly be seeking to get some clarity around some areas," she explained.
Nicholson and fellow partner Andrew Gray issued a client update flagging areas of uncertainty in the legislation on Wednesday. Among the issues raised was the timing of shareholder approval meetings required for termination payment approval.
Under the proposed legislation, reaching a termination payment that exceeds a cap of one year's average base salary will trigger the new shareholder voting provisions. However, the shareholder meeting cannot be called for the "sole or dominant purpose" of passing the approval resolution - an inefficient outcome for both exiting executives and their former employers.
"Basically, that says you've got to wait for an annual general meeting (AGM) and I don't see how that's tenable, because people's rights will be triggered on termination ... What if the AGM was 10 or 11 months away? Companies are not going to want to do that, because they are going to want to move on," Nicholson said.
The timing of contract formation and subsequent variation will also come under closer scrutiny, because the proposed legislation will not have retrospective effect.
"It's going to be quite difficult for corporates, because a lot of them do have a culture of improving their contracts to reflect current conditions. If you change, for example, the performance levels, will that be a variation? It's those sorts of issues that will have to be sorted, I think, as they may affect the retrospective operation. I think [the drafters] will tighten the draft legislation in that area, or at least make it express to deal with that situation."
Additional areas of complexity are created by superannuation entitlements, tax and the timing of payouts from incentive schemes such as company share options.
"Those are going to be quite complicated to work through and it will all turn on the drafting, but there will be a mismatch between terms and tax, more than likely, because mostly the tax will be triggered on termination. Now that's a gross generalisation of what is a very complicated tax area, but there are certainly going to be issues within that," she said.
Nicholson said real world factors needed to be taken into account by the drafters of the legislation, including the inherent personal and financial risks of accepting an executive posting.
"I think that's part of the debate that's been lost - there is a risk in corporate life that you don't have these jobs forever, and the payment was to be for that risk and it's sort of like a payment in lieu of notice. So from the executive's level it's [the cap on termination payments] going to feel quite low...dramatically lower."
- Laura MacIntyre
The Bill, which will be introduced into Parliament during the Winter sittings, will be open for public consultation for a four-week exposure period ending on 2 June, 2009.