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Can a company pay a large benefit to an exiting director?

Did you know that under section 200B of the Corporations Act, a company may not be allowed to pay a large benefit to an exiting director or senior manager without the approval of the company’s shareholders?

One example of a benefit to a retiring director would be an overly-generous ‘golden handshake’ paid to a director of a listed company, however the legislation goes much further than that.

A ‘benefit’ includes money but also land and other property. Payments to any director or manager of any company could be caught and the benefit will be caught regardless of whether they are paid to the retiring director personally or on their behalf to a related party (such as a family trust shareholder). Also, a payment will still breach the legislation even if it was contractually obligated, although some payments such as bonuses under a statutory cap or amounts payable under law will not trigger the legislation.

Consider this example

A shareholders’ agreement obliges a retiring director (who is also a shareholder) to sell her equity back to the company at the time of her retirement. The shareholders’ agreement says that the retiring director is to be paid many times over market value for her shares. If the payment is made without shareholder approval by resolution, both the company and the retiring director may have committed an offence under the Corporations Act.  Also, the retiring director will be obliged to repay the benefit to the company.

What are the exceptions?

A payment to the retiring director or manager can be exempt in certain circumstances. Examples include where the payment is less than twelve months’ base salary, or where the payment is required by law (such as superannuation payments or damages for breach of contract).

Alternatively, the benefits can be approved by shareholder resolution, where decisions are stated formally. The shareholders must pass the resolution by simple majority having first received notice with full particulars of the benefit to be paid to the departing director or manager.

For further information, contact our Legal team here.