The Advisors' Blog

– Daniel Smith and Michael Chandler, ISS’ Australia & New Zealand Research

The 2012 proxy season marks the second year under Australia’s controversial “two strikes” law. As investors, boards, executives, and the broader public gear up for an intense debate over the appropriateness of executive pay practices in the market, now is a good time to review the legislation and implications of a second strike. The two strikes regime, introduced through the Corporations Amendment (Improving Accountability and Executive Remuneration) Act 2011, went into effect on July 1, 2011. Shareholders should note the following mechanics of the law:

– A company will incur a first “strike” if it records at least 25 percent “against” votes on the resolution to approve the remuneration report at the annual general meeting (AGM).
– If the company receives at least 25 percent “against” votes on the remuneration report at the subsequent AGM, the company will incur a second “strike.”
– If the company records a second “strike,” shareholders must also vote on a “spill resolution” to determine whether a general meeting should be called to consider the election of certain directors on the board (“spill meeting”).
– If 50 percent of votes cast on the “spill resolution” are in favor, then the company must call a spill meeting to be held within 90 days of the second AGM.
– In this case, all directors, aside from the managing director, who were directors at the time “when the resolution to make the directors’ report [which contains the remuneration report] considered at the second AGM was passed” will cease to hold office before the end of the spill meeting, unless the director is reelected at the spill meeting.
– In order to prevent a complete board spill in the event no directors are reelected at the spill meeting, at least three directors will remain on the board after the spill meeting: the managing director, and the two directors who received the highest percentage of “for” votes on their reelection.

Companies that have already recorded a first strike in 2011 are required to detail in the notice of meeting for their 2012 AGM the implications that will arise from losing most board directors. These companies are also required to highlight the degree of uncertainty that results from a spill meeting, irrespective of whether those directors are to be replaced. There are currently 23 companies within the S&P/ASX 300 index that are facing a potential second strike and subsequent board spill meeting in 2012.

With the two strikes law raising the stakes, many shareholders are prepared to put more pressure on boards. According to an August 2012 study jointly conducted by the Melbourne Institute and Global Proxy Solicitation, just over half of respondents indicated that they would be more likely to vote against remuneration proposals if their company had already received a first strike at the 2011 AGM.

Earlier this year, as heat of summer gave way to the cooler air of autumn, a flurry of equity raisings at blue chip companies left a number of Australian investors feeling like they were left blowing in the wind. The tone was set with QBE Insurance’s (QBE) A$450 million placement, completed in February 2012, and reinforced with Bank of Queensland’s (BOQ) A$150 million placement, announced in March 2012. In neither placement were existing shareholders able to participate to avoid dilution to their equity position, and both placements raised shares at a discount to the then-current market price: QBE’s was at 4.9 percent, and BOQ’s was at 17.1 percent.

At the same time, both institutions combined these placements with raisings in which existing shareholders could participate. QBE raised an additional A$150 million through a share purchase plan; BOQ also brought in A$150 million, through a pro-rata entitlement offer. This apparently was not enough to assuage some investors, who believed there was plenty of demand by shareholders already on the company register to meet these institutions’ capital needs.