On 1 July 2011, a range of reforms to the Corporations Act were implemented. These reforms were principally aimed at increasing the level of accountability on director and executive remuneration.

One of the reforms was aimed at ensuring that directors and executives are held accountable on remuneration resolutions, by introducing the potential for some of a listed company's directors to be required to stand for re-election1. This requirement is triggered where, at two consecutive AGMs, at least 25% of votes cast on a resolution concerning approval of the company's remuneration report are against adoption of the report. This is commonly referred to as the 'two strike' rule.

This reform was accompanied by the introduction of a restriction on a company's key management personnel casting votes on resolutions concerning the company's remuneration report. This restriction also effectively prohibited key management personnel from voting undirected proxies on the resolution.

Whilst these reforms were aimed at improving accountability to shareholders, the reforms did have an unintended effect. Due to a perceived drafting error, an important exception to the restriction on voting undirected proxies was invalidated. The perceived error concerned the voting of undirected proxies by a chairperson who was also a member of the company's key management personnel, and effectively prohibited such a chairperson from voting undirected proxies on remuneration report resolutions (even where the shareholder voting by proxy acknowledged that the resolution concerned the remuneration of the company's key management personnel).

What this drafting error meant was that the votes of shareholders voting by undirected proxy through the chair could potentially not have been counted for the resolution. As such, some directors could potentially be forced to stand for re-election even where the total number of votes against the remuneration report would not have otherwise met the minimum 25% threshold required under the 'two strike' rule.

There have been repeated calls for correction of the Act, and in response, the Corporations Amendment (Proxy Voting) Act 2012 has recently been passed and received royal assent. The amending legislation clarifies that the chair of the meeting (even where he or she is a member of the company's key management personnel) can vote undirected proxies on a resolution concerning the remuneration report, so long as the chair is expressly authorised to vote in relation to the resolution notwithstanding that it concerns the remuneration of the company's key management personnel.

In light of the upcoming AGM season, the clarification gives directors comfort that the 'two strike' rule will operate as originally intended. The fact that the chair of the meeting may vote undirected proxies on the remuneration report also overcomes the potential for directors to be required to stand for re-election unnecessarily.

Footnotes

1 The requirement to stand for re-election does not apply to all directors. Exclusions from the requirement apply to directors that were not directors at the time the remuneration report was put to shareholders for the second time, and also managing directors that are entitled (pursuant to the listing rules of a prescribed financial market applicable to the company) to continue to hold office indefinitely without being re-elected.

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