Enterprise and Regulatory Reform Bill

ERR 50

Submission from Squire Sanders (UK) LLP

Submission to the Public Bill Committee in respect of New Clause 8(4) of the Enterprise and Regulatory Reform Bill (the "Bill") (inserting a new Chapter 4A, Part 10 of the Companies Act 2006)

Summary

 

1. Under the proposed amendments to the Companies Act 2006, if a director’s service contract is modified and the first binding vote on remuneration policy is not carried the director will lose entitlement to all remuneration until a subsequent vote is carried. This will discourage companies from making appropriate changes to contracts in preparation for the new regime.

 

About Squire Sanders

 

2. Squire Sanders is an international law firm operating in 18 countries through 37 offices. In the UK, Squire Sanders advises a variety of quoted companies (ranging from FTSE 100 downwards) on issues relating to executive remuneration issues and therefore expect to be advising on the issues referred to in this submission once they are enacted.

 

Background

 

3. Although there has been public consultation on the principles involved, the text of the amendments to the Bill that have been tabled in respect of the introduction of a new binding shareholder vote remuneration policy has not been subject to consultation and we are concerned that its current form may have significant unintended consequences.

 

New Clause 8 (3)

 

4. This sub-clause appears to be intended to have the effect that the new prohibition in s266B of the Companies Act 2006 on paying remuneration otherwise than in accordance with a remuneration policy approved by shareholders under the new Chapter 4A, Part 10 of the Companies Act 2006 will not apply to payments made under contractual commitments entered into before 27 June 2012. This means, for example, that if a company is in the situation that the first binding vote on remuneration policy (likely to be in 2014 for most quoted companies) is not carried, the company will be able to continue to pay its directors salary under pre 27 June 2012 service contracts, pending a resolution at a subsequent general meeting being carried.

 

Effect of New Clause 8(4)

 

5. The effect of sub-clause 8(4) appears to be that if any changes are made to a service contract after 26 June 2012 then the "grandfathering" effect of having a pre-27 June service agreement is entirely lost. If that is correct, then if the vote referred to in paragraph 3 above is lost then the company will be unable to pay the relevant executive directors any remuneration (including salary) until a subsequent vote is carried. We do not think that such an outcome is appropriate and indeed may not have been intended when new clause 8(4) was drafted.

 

6. We understand that the overall intention of the introduction of the binding vote on remuneration policy, combined with the changes to remuneration reporting regulations on which the Department for Business Innovation and Skills is currently consulting, is to promote the adoption by quoted companies of remuneration policies that are more in line with the expectations of shareholders.

 

7. It would therefore be expected that quoted companies will be examining their existing remuneration policies in the run-up to the new regime coming into force, with a view to ensuring that such policies meet the expectation of shareholders. However, if making changes to remuneration arrangements would lose the "grandfathering" status of pre-27 June 2012 contracts, companies will be discouraged from making changes even though it is public policy to encourage companies to make such changes.

 

Suggested amendment

 

8. We would suggest that new clause 8(4) be amended so that the pre-27 June position is "grandfathered" even if the relevant contract is subsequently amended in the following form:

 

"(4) An agreement entered into, or any other obligation arising, before 27 June 2012 that is modified or renewed on or after that date is to be treated for the purposes of subsection (3) as remaining in the form that existed prior to any such modification or renewal."

9. This amendment would resolve the issue outlined above in respect of executive directors holding positions before 27 June 2012. However, there could still be the issue of a lack of a fall back position in respect of the executive directors appointed after 27 June 2012, where no grandfathering would apply, although that situation is perhaps less significant.

 

July 2012

Prepared 18th July 2012