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Diversified industrials e-briefing: UK regulatory changes: Directors’ remuneration

    • Aerospace, defence and security
    • Automotive
    • Chemicals
    • Industrial engineering
    • Industrials



    UK incorporated industrial and manufacturing companies which are listed in the UK or in another state in the European Economic Area (EEA) or the New York Stock Exchange or NASDAQ have to conform with new rules regarding directors remuneration which are due to come into force on 1 October 2013.

    The changes will apply in relation to financial years ending on or after 30 September 2013. The reforms will have the effect of impacting on any annual general meetings held in a financial year that commences on, or after, 1 October 2013.

    Companies must seek shareholder approval of their remuneration policy before the end of the second financial year beginning after 1 October 2013. A company with a financial year end of 31 December, will have to have sought such shareholder approval by 1 January 2015.

    The changes therefore are an increased compliance burden for UK industrial and manufacturing businesses listed in the UK or elsewhere. More significantly, the changes impose increased shareholders’ control over the remuneration and termination packages that can be agreed with directors. There is also potential personal liability for directors who approve unauthorised payments outside the agreed remuneration policy.

    Summary of changes

    A summary of the changes to be implemented:

    • Companies are to produce a policy on directors’ remuneration. This policy will provide a clear explanation of how the company is to remunerate directors (this includes all forms of remuneration) and must operate in tandem with the long-term strategy, and general performance, of the company.
    • Any payments to directors (both remuneration and loss of office) must then be made strictly in accordance with this policy.
    • Shareholders will have a binding vote on the approval of this policy (it should be noted that resolutions relating to these provisions will all be ordinary resolutions, requiring a simple majority) and the policy will have to be put to a shareholders’ resolution at least every three years, with any changes to the policy having to be voted on by the shareholders’ at a general meeting. If approval is not given, the company can only make payments in accordance with the last policy to have been approved by a shareholder resolution, or seek a separate shareholder resolution for the specific payment which is not consistent with the policy.
    • Remuneration and loss of profits payments must be in-line with the remuneration policy, unless they have been specifically authorised by shareholders’ resolution.
    • An annual implementation report must be prepared by the company in relation to the policy, showing a single figure for the total amount provided to directors in that year. The shareholders will have an annual vote to approve this implementation policy (if this vote fails, then the remuneration policy must be put to the shareholders vote the following year).
    • Any outgoing directors will trigger the requirement to publish a statement, showing payments that the director has received or may receive in the future. It should be noted that this statement will only be required when a director leaves the company and will not be required whenever negotiating or making a remuneration payment to a director.
    • Companies will be obliged to publish certain information on their publically accessible websites, including the reports referred to above.
    • There are detailed rules relating to presentation of information in remuneration reports, which will require the identification of individuals by name and details of performance measures or targets. Although companies will be able to omit “commercially sensitive” information, such information is not defined, meaning that a company will require proper justification for omitting any information from its reports.

    Breach of the remuneration policy

    A contractual obligation in a contract with a director to make a non-compliant payment will have no effect and is unenforceable.

    Payments made to directors in breach of a company’s remuneration policy will be deemed to be held on trust by the payee, and an action by be brought by the directors on behalf of the company. Shareholders will be able to use derivative rights to pursue such action if the company’s directors are unwilling to act, which will require an application by the relevant shareholders to the court.

    Directors will be potentially directly liable to the company for any losses which are incurred as a result of a payment not being recovered (by the directors (or the shareholders acting on behalf of the directors). This will only apply where a director has authorised the payment in question. If a director who authorised an approved payment can prove that he or she acted honestly and reasonably, taking into account all circumstances, a court may relieve the director either wholly or in part on such terms as the court sees it.