House of Commons - Explanatory Note
House of Commons
Session 2002 - 03
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Arrangement of Clauses (Contents)

Company Directors' Performance And Compensation Bill






1.     The Bill contains two substantive clauses. Both amend the Companies Act 1985. Clause 1 amends the provisions of Part X of the 1985 Act by adding a new section 316A. Clause 2 amends paragraph 6 of Part 3 of Schedule 7A to the 1985 Act, which was inserted in that Act by the Directors' Remuneration Report Regulations 2002 (S.I., 2002, No. 1986), in respect of the contents of the directors' remuneration reports for quoted companies.

2.     The existing section 312 of the 1985 Act stipulates that it is not lawful for a company to make to a director any payment by way of compensation for loss of office, or as consideration for or in connection with his retirement from office, without prior shareholder approval. Existing subsection 316(3), however, excludes from this restriction bona fide payments by way of damages for breach of contract or by way of pension in respect of past services. The effect of this subsection is that most contractual compensation or damages payments do not require shareholder approval.

3.     Subsection (1) of the new section 316A of the 1985 Act relates to the amount of any compensation or payment for loss of office or of employment paid or payable to a director of a company on the termination of his office or employment. In addition to the requirement for shareholder approval under section 312 (where it applies), subsection 316A(1) requires such amount to be that which is fair and reasonable at the time of the director's termination taking into account any failure of the director concerned in the performance of his duties as a director or as an employee. The provision covers all termination arrangements, whether provided for in the director's employment contract, agreed at the time of termination or otherwise. It covers cash payments and benefits receivable otherwise than in cash (see subsection (4) of the new section 316A of the 1985 Act).

4.     Subsection (2) of the new section 316A of the 1985 Act requires a company to disclose the amount of any compensation or payment made to a director for loss of office or of employment upon request by any of its shareholders.

[Bill 22-EN]     53/2

Subsection (3) details that the company may discharge this obligation either by disclosing the amount to the shareholder requesting it or by putting the relevant information on its web site and telling the shareholder who requested it that it has done so.

     5.     Subsection (4) of the new section 316A of the 1985 Act stipulates that any payment made in breach of subsection (1) is deemed to be held by the recipient director in trust for the company. This provision would allow redress where a payment made by the board is subsequently successfully challenged. The same device is used in, for example, the existing subsection 313(2).

6.     Clause 2 requires companies to explain why they consider the amount paid to or receivable by any director by way of compensation for loss or office or in connection with the termination of his services to be fair and reasonable where it exceeds 12 months' basic salary and fees. This explanation is to be contained in the directors' remuneration report. Unlike Clause 1, which applies to all companies formed and registered under the 1985 Act, this requirement only relates to quoted companies (i.e. companies whose equity share capital (a) has been included in the official list in accordance with the provisions of Part VI of the Financial Services and Markets Act 2000; or (b) is officially listed in an EEA State; or (c) is admitted to dealing on either the New York Stock Exchange or the exchange known as Nasdaq).

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Prepared: 24 January 2003