The Enterprise and Regulatory Reform Act 2013 (“ERRA”)
The ERRA has made changes to the Companies Act 2006, the most noteworthy of which mean that:
- Listed companies’ directors’ remuneration policies must be approved by a binding shareholders’ vote (by way of an ordinary resolution) at least once every three years; and
- Remuneration payments and loss of office payments may not be made to current, past, or (in the case of remuneration payments) future directors unless they are either (i) consistent with the approved directors’ remuneration policy, or (ii) approved by a binding shareholders’ vote (by way of an ordinary resolution).
Remuneration payments and payments for loss of office made without shareholder approval will be held by the recipient on trust for the company/person making the payment (unless the company has been taken over, in which case the payments will be held by the recipient on trust for the departing shareholders). In certain circumstances, although not in relation to asset sales or share sales resulting from a takeover bid, any director who authorised the payment may also be jointly and severally liable for any loss resulting from such payment. The court may relieve any implicated director from liability (either wholly or in part) if the court thinks that such director has (i) behaved honestly and reasonably, and (ii) ought to be relieved of liability, having regard to all the circumstances of the case.
Future Developments
It will be interesting to see if these new rules, designed to improve the correlation between executive pay and company performance, will be seized upon by activist shareholders as a new means of holding directors to account and whether or not they will result in a curb in executive pay levels. It is likely that there will be tension between the terms of directors’ employment agreements and the remuneration policies by which such directors will be bound. Until now, directors’ employment agreements have been negotiated between companies and prospective directors on the basis that a company has sole discretion to set remuneration levels (although shareholders have previously been able to vote in relation to directors’ pay, this vote has never been binding). As of 1 October this is no longer the case, so a company could find itself in breach of an existing agreement if a director’s pay package is reduced following a shareholders’ vote. It is likely that these agreements will now have to be ‘future-proofed’ to allow for changes in remuneration policies. What is certain is that boards and remuneration committees of listed companies will now have a powerful incentive to increase shareholder remuneration consultations and more closely link pay and performance than perhaps has been the case previously.
