A recent unreported decision of the NSW Supreme Court should have executives rushing to their lawyers to check that their entitlements on retirement or termination from office have been properly approved by shareholders.
It is not enough that shareholders have been told about an executive’s termination benefits and then given some general approval to them. For termination benefits approval to be effective, requirements as to both form and substance need to be strictly observed.
Laura McBain, former Managing Director and CEO of Bellamy’s Australia, was unfortunately caught out on both counts with respect to her termination entitlements.
In McBain v Bellamy’s Australia Ltd  NSWSC 1152 decided on 26 July 2018, Justice Stevenson held that, for the purpose of meeting the shareholder approval exception to the statutory limit on termination benefits imposed by the Corporations Act 2001 (Cth):
- (form) Bellamy’s shareholders had not “approved” the accelerated vesting of Ms McBain’s options on termination of her employment with Bellamy’s, because the resolution did not expressly refer to the relevant provisions of the Corporations Act; and
- (substance) the notice of meeting for the shareholder meeting was deficient in that it did not set out sufficient details of the “benefit” that Ms McBain would receive on termination of her employment (i.e. the accelerated vesting of her options). In particular, the notice of meeting should have detailed the manner in which the “value” of the benefit was to be calculated and any matter, event or circumstance that will, or is likely to, affect the calculation of that value.
The full story
The statutory limit on benefits on termination from a managerial or executive office is contained in section 200G of the Corporations Act. The provision allows payments and other benefits to be given to an executive on termination from office provided their value does not exceed the average annual base salary that the person received from the company and its related bodies corporate during the last 3 years of the person’s employment.1
Ms McBain became Managing Director and CEO of Bellamy’s Australia in 2011, and was invited in 2015 to apply for options over shares in the company pursuant to a long term incentive plan approved by shareholders in 2014. At the time Ms McBain’s employment was terminated by Bellamy’s on 11 January 2017, she held a total of 825,877 unvested options over shares in Bellamy’s.
Under the incentive plan, Ms McBain was entitled, upon termination of her employment, to exercise 504,870 options, being the portion of her total options that was to vest immediately on termination. However, as a result of other payments that Ms McBain was to receive in connection with her termination, the Bellamy’s Board determined that the number of options that Ms McBain could exercise needed to be “scaled back” to 116,348, in order to comply with the statutory limit on termination benefits.
Ms McBain argued that the accelerated vesting of her options was not subject to the statutory limit, as shareholders had approved the terms of the incentive plan under which her options were issued, at the Bellamy’s AGM on 30 October 2014.
Specifically, Ms McBain pointed to section 200E of the Corporations Act which allows shareholders to approve the payment of termination benefits to an executive above the statutory limit provided two conditions are satisfied:
- (condition 1) the giving of the benefit has been approved by a resolution of shareholders passed at a general meeting of the company; and
- (condition 2) details of the benefit are set out in the notice of shareholder meeting or accompanying material including, where the value of the benefit cannot be ascertained at the time of the meeting, details of the manner in which that value is to be calculated and any manner, event or circumstance that will, or is likely to, affect the calculation of that value.
Condition 1: Form of the Shareholder Resolution
The court accepted that shareholders had approved the issue of options to McBain and their terms of issue, but only in the context of the ASX listing rule requirements, and not for the purposes of section 200E.
McBain argued that the use of the words “and for all other purposes” in the shareholder resolutions approving both the issue of options to her and the incentive plan, were sufficient to cover section 200E approval.
The Judge disagreed. His Honour said “the issue is whether the members were given sufficient information about that proposal to enable their vote to be characterised as an “approval” for the purposes of [section 200E]”.2
The Judge accepted that shareholders were informed that on termination of her employment, Ms McBain would be entitled to retain vested but unexercised options and that “unvested options … would vest immediately”. However importantly, shareholders were not told that:
- the acceleration of the unvested options would constitute a benefit under the termination benefits provisions of the Corporations Act; and
- section 200G placed a limit on the benefits that, absent shareholder approval, may be given to executives in connection with their termination or retirement.
On this basis, Justice Stevenson concluded that the first condition in section 200E had not been satisfied as shareholders had not “approved” the accelerated vesting of Ms McBain’s options as a termination benefit.
Condition 2: Substance of the Notice of Shareholder Meeting and Explanatory Statement
The Judge also held that the second condition to obtaining shareholder approval of a termination benefit, was not satisfied. This is the requirement to set out “details” of the benefit, in particular about its “value” and the matters that may affect the calculation of that value.
Justice Stevenson was of the view that, to satisfy this requirement, the notice of meeting needed to say something to the effect that “the manner in which the value to Ms McBain of the benefit was to be calculated would be the difference between the option price and the value of the shares at the date of exercise of the options”.
Further, in relation to the events or circumstances that will, or is likely to affect the calculation of that value, his Honour said:
“Two such matters would be the date of Ms McBain’s retirement from Bellamy’s and the then share price of Bellamy’s. Obviously, that actual date and share price could not be known as at the date of the Explanatory Notes. But those matters, stated in general terms as matters likely to affect value, were not included.”
The notice of meeting for Bellamy’s 2014 AGM did set out some information about Ms McBain’s options, including the methodology used to calculate the number (but not the value) of the options that would vest on an accelerated basis. But, in Justice Stevenson’s assessment, the information was far from what was necessary to properly inform shareholders of a proposed termination benefit and to seek their approval to the giving of that termination benefit under section 200E.
What have we learnt from Ms McBain’s experience?
It is often the case that a statement is left out of a notice of shareholder meeting on the belief that it is too vague or obvious to state. However, when it comes to shareholder sensitive issues like executive termination benefits, the courts appear to take the view that “more is better”.
The important takeaways from McBain’s case are that, to obtain proper shareholder approval for a proposed executive termination benefit, the notice of meeting or explanatory memorandum accompanying the notice must specifically:
- refer to the fact that approval is being sought from shareholders to grant a termination benefit to an executive for the purposes of section 200E of the Corporations Act; and
- include details of the benefit, including, where the value of the benefit cannot be ascertained at the time of the disclosure, the manner in which that value is to be calculated and any matter, event or circumstance that will, or is likely to, affect the calculation of that value.
There are many commercial reasons why an executive should be given payments and benefits on termination in excess of the statutory limit. But for a company to realise its promises to an executive in this regard, it must take care to satisfy the legal requirements that have been put in place to protect the unknowing shareholder.
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