15 August, 2018
McBain v Bellamy’s Australia Ltd [2018] NSWSC 1152
What you need to know
The main issue in McBain v Bellamy’s Australia Ltd [2018] NSWSC 1152 was whether a shareholder resolution passed at a general meeting approving an issue of options to the former managing director of Bellamy’s Australia Ltd for the purposes of certain Listing Rules “and for all other purposes” also constituted member approval of accelerated vesting of options on termination of employment for the purposes of the termination benefits provisions of the Corporations Act.
The answer in the case was “no” on the facts. For there to be member approval under the termination benefits provisions, members attention must be drawn to the restrictions in the termination benefits provisions. It is not sufficient to say the approval is “for all other purposes”. Furthermore, the notice of meeting needs to set out “details of the [termination] benefit” including details of “the manner in which that value is to be calculated and any matter, event or circumstance that will, or is likely to, affect the calculation of that value”.
The Court also expressed the view in obiter dicta that a member-approved termination benefit is not to be taken into account in calculating the value of benefits given for the purposes of the statutory cap in s 200G.
The facts of the case
Bellamy’s Australia Ltd is an ASX listed company. Ms McBain was first employed by Bellamy’s in 2006 and became the company’s CEO in 2011. At Bellamy’s 2014 annual general meeting resolutions were passed by shareholders approving:
“for the purpose of Australian Stock Exchange Listing Rule 7.2 Exception 9, and for all other purposes,” the issue of options or rights to acquire in shares in Bellamy’s under a Long Term Incentive Plan summarized in the Explanatory Notes to the Notice of AGM; and
“for the purpose of Australian Stock Exchange Listing Rule 7.2 Exception 14 and Rule 10.14, and for all other purposes,” the issue to Ms McBain up to 2,550,000 options to acquire shares in Bellamy’s under the Plan in 2014, 2015 and 2016 “as more particularly described in the Explanatory Notes”.
The Explanatory Notes included information about the Plan and the terms of the options to be issued to Ms McBain. It stated that on termination of employment (other than for serious misconduct) "a pro rata proportion of any granted but unvested Options, equal to the portion of the performance period that has elapsed and tested against performance hurdles, will vest immediately".
In 2015, Ms McBain was invited to apply for up to 825,877 options at an exercise price of $1.30 per option.
In 2017, Ms McBain’s employment was terminated and she was paid $224,723.20 in lieu of notice (the “Payment in Lieu”). In addition, as at the date of termination she was entitled to 504,870 of the 825,877 options issued to her. However, Bellamy’s “scaled back” the options available to Ms McBain to 116,348 options. Bellamy’s had “scaled back” the options available to avoid breaching the termination benefits provisions of the Corporations Act (Division 2 of Part 2D.2).
Section 200B of the Corporations Act prohibits a company giving a benefit in connection with a person’s“retirement” from an office or position of employment in the company if the office or position is a “managerial or executive office”, unless there is member approval under s 200E. There was no dispute that Ms McBain held a managerial or executive office as defined in the legislation. As “retirement” is relevantly defined to include “loss of office”, the termination of Ms McBain's employment constituted a retirement as defined. On termination of her employment there was accelerated vesting of the options to which Ms McBain was entitled and this constituted a benefit on termination of employment.
Ms McBain claimed she was entitled to the 388,522 options that were not made available to her on the basis that Bellamy’s members had approved the giving of the benefit at the 2014 annual general meeting.
The main issue in the case was whether there had been member approval of the benefit under s 200E.
Was there member approval for the benefit?
The Court held that the resolutions passed at the 2014 annual general meeting did not constitute member approval for the purposes of the termination benefits provisions, even though the approval was expressed to be “for all other purposes”. For there to be member approval under s 200E, the benefit must be approved by a resolution passed at a general meeting of the company. The Court found that, although members were informed that if Ms McBain ceased to be employed, she would be entitled to retain vested but unexercised options and that “unvested options…would vest immediately”, the Explanatory Notes did not direct members’ attention to the restrictions in the termination benefits provisions of the Corporations Act and specifically did not explain that:
the acceleration of the unvested options would constitute a termination benefit under those provisions; or
the provisions limit the benefits that, absent shareholder approval, may be given to executives in connection with their termination or retirement.
The words “and for all other purposes” were not sufficient to alert a reasonable shareholder to these matters.
Furthermore, the Court held that the materials provided to shareholders did not set out “details of the benefit”and specifically did not include details of “the manner in which that value is to be calculated and any matter, event or circumstance that will, or is likely to, affect the calculation of that value”, as required by s 200E. The Court noted two matters that will, or are likely to, affect the calculation of value of the benefit would be the date of Ms McBain’s retirement from Bellamy’s and the then share price of Bellamy’s; those matters, stated in general terms as matters likely to affect value, could have been included but were not.
The cross-claim issue – obiter dicta
Had the Court found that there was member approval for Ms McBain’s termination benefit under s 200E and Ms McBain was therefore also entitled to exercise the remaining 388,522 options, it would have had to determine the issue in Bellamy’s cross-claim. In its cross-claim, Bellamy’s had contended that Ms McBain was liable to repay the Payment in Lieu in that event because:
- the benefit represented by Ms McBain’s ability to exercise the remaining options should be counted towards the cap in s 200G;
- Ms McBain would in those circumstances have received termination benefits in excess of the s 200G cap to the extent of the amount equal to the Payment in Lieu; and
- by reason of the combined effect of ss 200B and 200J of the Corporations Act, Ms McBain held the excess on trust for Bellamy’s.
Section 200G provides that s 200B does not apply to a benefit if the benefit is a payment for past services rendered to the company and the “value of the benefit” in question when added “to the value of all other benefits…already given in connection with the person’s retirement” does not exceed the statutory cap.
The precise question in issue was whether a benefit “already given” for the purpose of s 200G is any benefit already given, whether or not subject to s 200E approval, or only benefits already given that have not been the subject of s 200E approval. (The same question could also arise under the statutory cap in s 200F which is drafted in similar terms.) The provisions do not expressly say whether a benefit given with member approval under s 200E is to be ignored for the purpose of working out whether it counts towards the statutory cap.
Although the section refers to “all other benefits…already given” without qualification such that a literal reading of s 200G favours the former view (as contended by Bellamy’s), the Court preferred an alternative purposive reading of s 200G as “it is hard to see why Parliament would have intended that the benefit, removed from the general prohibition in s 200B by reason of being the subject of a s 200E approval, would nonetheless be subject to the cap in s 200G”. The Court cited with approval the following passage from Austin & Black’s Annotations to the Corporations Act at [2D.200G]:
“What if a benefit has been approved by shareholders under s 200E? On balance, it appears that a member-approved benefit is not to be taken into account in calculating the value of benefits for the purposes of the s 200G cap. This is on the basis that s 200G operates as an exemption to the prohibition in s 200B(1), and therefore assumes that the benefits to which it applies are benefits that would otherwise be prohibited. A member-approved benefit complying with s 200E is not prohibited by s 200B because of the terms of s 200B(1). Therefore when s 200G(1)(c) refers to the ‘value of the benefit’, it is referring to the benefit that is to be permitted under s 200G, which is necessarily a benefit that would otherwise be prohibited. By extension of that reasoning, when subpara (c) goes on to refer to the value of other benefits already given, it is referring to benefits that would otherwise be prohibited, and therefore is not referring to member-approved benefits. That is confirmed by the direction to disregard payments to which s 200F applies. The contrary outcome, in which member-approved benefits would be counted towards the cap, would be obviously unfair.”
For further information, please contact:
John Sartori, Partner, Ashurst
john.sartori@ashurst.com
