Golden Handshakes or Corporate Excess?

Section 200B of the Corporations Act 2001 (Cth) places restrictions on the giving of certain benefits to employees on their exit from the organisation in certain circumstances.  These benefits are often referred to as “golden handshakes” and are subject to strict requirements before they can be made.

Generally, a departing person cannot receive benefits worth more than a year’s pay in connection with their exit from the company. This includes payments, but also non-cash benefits including share-based benefits.

Which persons at a company are affected by these restrictions?

The persons at a company who are affected include those who hold a managerial or executive office in the company or related body corporate, or those who have held such an office in the three years prior to retirement.

The restrictions apply regardless of whether the person’s departure is due to resignation, termination of employment, planned departure, or any other reason. The restrictions are broad and applicable to all benefits given “in connection with retirement”.

Scope of the definition of “benefit”

The termination benefits regime applies broadly because section 200AB of the Corporations Act 2001 (Cth) adopts an expansive definition of what constitutes a “benefit”. Companies should therefore not assume that the restrictions apply only to cash payments made to departing executives. Any form of valuable consideration, proprietary interest, or legal entitlement provided in connection with a person’s retirement or cessation of office may fall within the scope of the provisions.

In practice, this means organisations must carefully review all entitlements that may arise when a senior executive leaves the business. This review should extend beyond direct payments to include equity incentive arrangements, accelerated vesting of options, superannuation enhancements, and other non-cash benefits that may crystallise upon termination.

Critically, it is the total monetary value of all benefits that is capped by section 200B.

Further, the restrictions do not apply to a benefit given to a person if it is an obligation under law, except where the purported obligation is contained in the person’s contract of employment.

How is the monetary cap on the “golden handshake” calculated?

The monetary cap on the golden handshake is the average annual base salary that the person received while holding their managerial or executive office.

If the person worked at the company for less than one year, the amount is pro-rated.

If the person worked at the company for between one and two years, the amount is the average annual base salary the employee would have earned had they worked there for two years.

If the person worked at the company for between two and three years, the amount is the average annual base salary the employee would have earned had they worked there for three years.

If the person worked at the company for more than three years, it is the average annual base salary over the last three years of their employment.

Shareholder approval

Any benefits given to the departing executive which are greater than the statutory cap must be approved by a resolution passed at a general meeting of the company.

The details of the proposed benefits must be set out in the notice of the specified general meeting, including the total monetary value of the proposed benefit. Shareholders may amend a resolution and award a different or lesser benefit than was originally proposed. At the general meeting, the retiring executive (or their associate or proxy) cannot vote on the resolution.

The decision in McBain v Bellamy’s Australia Ltd [2018] NSWSC 1152 highlights the risks of failing to properly obtain that approval. In that case, the company’s incentive arrangements permitted unvested share options to vest upon termination of employment, giving rise to a benefit connected with the executive’s cessation of office. The Supreme Court of New South Wales held that the company had not secured valid shareholder approval for the purposes of the termination benefits provisions. In particular, the notice of meeting did not adequately draw shareholders’ attention to the potential operation of the termination benefit regime or clearly explain that the accelerated vesting of options could constitute a termination benefit. As a result, the purported approval was ineffective.

The case demonstrates that member approval must be specific and properly disclosed. General approval for participation in an incentive plan or for the issue of securities will not necessarily satisfy the requirements of the termination benefits provisions where benefits may arise in connection with an executive’s departure from office. Broad or general wording in shareholder resolutions—such as references to approval being granted “for all other purposes”—will not satisfy the statutory requirements. Instead, the notice of meeting must clearly identify the proposed benefit as a termination benefit, explain how the relevant provisions apply, and provide sufficient information about the nature and value of the benefit to enable shareholders to make an informed decision.

Closing loopholes

A company cannot subvert golden handshake restrictions by giving a departing executive benefits via an entity or superannuation fund associated with the company.

Furthermore, a company cannot subvert golden handshake restrictions by awarding shares or equity in property to a person who has a close personal connection with the departing executive. The exhaustive list of such people includes:

• Their spouse.
• Their relative (and spouse).
• Their associate (and spouse).

Strict liability and exposure to penalties

If an entity contravenes the golden handshake restrictions by giving a benefit to a departing executive that is greater than the statutory cap, the payment is taken to be received on trust for the giver and must be immediately repaid by the recipient.

Any amounts repayable are taken to be a debt due to the giver and may be recovered by the giver in court. This applies to the whole of the unlawful benefit, not just the amount exceeding the statutory cap.

Penalties apply to individuals and corporations who breach the restrictions. Individuals face fines of $59,400 and six months’ imprisonment. The termination benefits provisions also create strict liability criminal offences. As a result, a lack of awareness of the statutory requirements, or inadvertent non-compliance, will not necessarily prevent liability from arising. Both the entity providing the benefit and the individual receiving it may be exposed to penalties if the regime is breached.

In addition, directors and officers who approve termination arrangements that do not comply with the legislation may face scrutiny in relation to their statutory and fiduciary duties, including the duty to exercise care and diligence in the discharge of their responsibilities.

Implications for employers and executives

The restrictions carry numerous potentially major implications for both companies and personnel.

Firstly, the restrictions require companies to ensure that executive remuneration packages are carefully structured from the outset. As the statutory cap on termination benefits is calculated by reference to an executive’s average annual base salary during the relevant period, companies must carefully consider whether benefits that arise on termination may fall within the scope of the regime.

The restrictions have practical consequences for example, in the following circumstances, when a departing executive:

• is provided an ex gratia payment in exchange for a deed and the ex gratia payment offends the cap;
• the vesting of the employee’s equity is accelerated because of the termination;
• the executive is given the benefit of the use of a paid office, motor vehicle, the value of which – on its own or combined with other benefits (eg ex gratia payment) – exceeds the cap.

Relevance in the contemporary regulatory environment

The termination benefits regime forms part of a broader framework aimed at strengthening corporate governance and executive accountability in Australia. Further reforms were introduced through the Corporations Amendment [Improving Accountability on Director and Executive Remuneration) Act 2011 (Cth)], which implemented measures such as the well-known “two strikes” rule for remuneration reports and restrictions on the hedging of unvested remuneration by key management personnel.

These developments reflect an ongoing policy objective of ensuring that executive remuneration practices are transparent, subject to shareholder oversight, and appropriately aligned with corporate performance.

The provisions are particularly significant for ASX-listed entities, where termination payments to senior executives and directors are frequently subject to close scrutiny by investors, regulators and the media. Companies should ensure that their boards and remuneration committees have a clear understanding of the requirements contained in Division 2 of Part 2D.2 of the Corporations Act, and that appropriate governance procedures are followed when negotiating or approving executive exit arrangements.

Key considerations for employers and advisers

When dealing with termination arrangements for senior executives and directors, companies and their advisers should keep several key principles in mind:

• The concept of a “benefit” extends beyond cash payments, as discussed above. Likewise, “retirement” for the purposes of the legislation encompasses resignation, termination, loss of office and, in some circumstances, death.
• Shareholder approval must be properly informed. A resolution will not constitute valid approval under section 200E unless shareholders are clearly informed that the proposed payment is a termination benefit and are provided with sufficient detail about its nature and value.
• The statutory cap is based on average annual base salary. The threshold for termination benefits is calculated by reference to the executive’s average annual base salary over the relevant period, rather than their total remuneration package. Companies must therefore carefully determine the applicable calculation period.
• Anti-avoidance provisions are comprehensive. Attempts to structure payments indirectly — such as through related entities, superannuation arrangements or associates of the departing executive — may still fall within the scope of the legislation.
• The consequences of non-compliance are significant. If a termination benefit is provided in contravention of the regime, the amount must generally be repaid in full, not merely the portion exceeding the statutory threshold. The payment may be recoverable as a debt owed to the company, and criminal penalties may also arise.

Conclusion

Section 200B of the Corporations Act 2001 (Cth) imposes important limitations on the ability of companies to provide termination benefits to senior executives and directors without shareholder approval. The Act and subsequent reforms reflect a broader legislative commitment to transparency, accountability and responsible executive remuneration practices.

For employers, the key lesson is the need for careful planning. Executive employment agreements, incentive schemes and termination arrangements should be structured with the termination benefits provisions firmly in mind, and any required shareholder approval must be obtained through a clear and properly informed process. For departing executives, the provisions serve as a reminder that benefits received in excess of the statutory threshold may be subject to recovery if the necessary approvals have not been obtained. We regularly advise our clients as to how to meet their obligations under the Corporations Act.

If you require any assistance or information in relation to this client alert, please do not hesitate to contact us.