New requirement for announcement of directors' termination packages on departure

From today, new rules apply when a director leaves a UK incorporated listed company. Companies will, at the time of the relevant departure, have to publish on their website details of payments made or to be made to that departing director. The new rules apply to departing non-executive directors as well as executive directors.

The stated purpose behind this new provision, which forms part of broader changes to UK company law taking effect over the next 2 years requiring more detailed remuneration reports and an annual binding vote on directors' pay, is to give shareholders details of termination packages while the reasons for the departure are fresh in the minds of shareholders. In the past, companies have been accused of waiting until the next annual report to announce termination packages by which time issues have been forgotten and it is too late for shareholders to take effective action.

Strictly, the requirement is to put an announcement about the payments on the company's website, but many companies will sensibly, if they can, combine it with their RIS announcement on the director leaving which they are already required to make under the Listing Rules.

"Payments" made or to be made to a director includes cash, shares and other benefits - eg keeping a company car, medical insurance etc. While BIS have confirmed that only one announcement needs to be made (and so companies do not need to make an announcement saying, for example, that someone leaves with the right to exercise options over 100,000 shares and then separately have to report the actual exercise), there are, as always with new legislation, difficult and unresolved issues still to be addressed and resolved by reference to market practice. With sudden departures, termination arrangements may not be agreed at departure and so companies may be in a difficult position of wanting to delay an announcement until as much detail is agreed as possible yet under an obligation to make the announcement as soon "as reasonably practicable" after departure and to give particulars of the relevant "amount and how it was calculated". In these circumstances, they are likely to go along with the GC100/Investor Group recommendation that estimates be given if necessary and then subsequent remuneration report(s) give details of the actual amount paid.

Announcements about termination packages will therefore now become a regular feature, whether departures are routine, amicable or otherwise, and whether the payments made or to be made are of outstanding non-executive directors fees, salary or more complicated bonus arrangements.

These announcements will require much more preparation than historic departure announcements. Once companies have a binding directors' remuneration policy in place, companies will, for example, need to ensure that their announcement of what a departing director is going to receive is consistent with their policy, otherwise shareholders will be likely to give early notice that they will challenge the payment.

For our most recent law-now on the changes to directors' remuneration in listed companies, please click here.