This e-brief sets out Parliament’s latest proposals on directors’ remuneration in the Enterprise and Regulatory Reform Bill and the Government’s Frequently Asked Questions on the remuneration reforms (published this month). The Bill is not yet law and these provisions are therefore not yet in final form.
Who will the proposals apply to?
A UK company whose equity share capital is listed on the Main Market, in another EEA State or on the New York Stock Exchange or NASDAQ (“quoted company”).
What are the key changes?
The directors’ remuneration report of quoted companies will need to include: a statement of the company’s policy on directors’ remuneration (“remuneration policy”); and information on the implementation of the previous remuneration policy (“implementation report”). Quoted companies will need to propose a binding shareholder vote, requiring a simple majority to pass, on the remuneration policy at least every three years and an annual advisory (non-binding) vote on the implementation report.
When will the changes apply?
The provisions are due to come into force on 1 October 2013 and will apply to the first financial year beginning on or after that date. All remuneration payments and payment for loss of office must be consistent with the company’s approved remuneration policy by the start of the second financial year beginning on or after 1 October 2013. Payments made before this date will not be unlawful.
Any payments made under an agreement entered into before 27 June 2012 need not be consistent with the company’s approved remuneration policy unless subsequently amended or renewed.
What happens if the vote fails on either resolutions?
If the binding vote on the remuneration policy fails, the company has the choice of either falling back on the last approved remuneration policy until the next AGM or calling a general meeting to put forward a revised policy. A company can always seek separate shareholder approval for any specific remuneration/loss of office payments outside the scope of the approved remuneration policy. If the vote fails on the implementation report in a year when the remuneration policy was not put to shareholders, this will not affect an individual director’s remuneration but a company will need to put its remuneration policy to a shareholder vote the following year.
To whom do the restrictions on remuneration payments apply?
Executive and non-executive directors, new directors (including payments to buy out an individual’s remuneration arrangements at another company) and payments to former directors.
What are the consequences of unauthorised payments?
Such payments are to be held on trust for the benefit of the company. The directors who authorised the payment can be held liable to indemnify the company for any loss resulting from it. The House of Lords has recently agreed an amendment to the Enterprise and Regulatory Reform Bill which would relieve a director from liability if he can show that he acted honestly and reasonably and the court considers that the director ought to be relieved of liability on such terms as it thinks fit.