With the 2021 AGM season upon us, this article sets out considerations for listed companies who receive director nominations.
Background and Timings
Director nominations have become more common in recent years with several high-profile companies having received them during the 2020 AGM season, including Macquarie Bank and Westpac.
ASX Listing Rule 14.3 requires a company to accept nominations for the election of directors up to 35 business days before the date of a general meeting at which directors may be elected, unless the company’s constitution provides otherwise (note: this can be a longer period as provided in your company’s constitution). In the case of a member requisitioned meeting, the deadline for receiving nominations is reduced to 30 business days before the general meeting. This rule does not apply to an externally managed trust.
A listed company can receive director nominations from shareholders, stakeholders, or any other third party. The nominee must be at least 18 years old and consent to taking on the role and responsibilities of a director.
Listing Rule 3.13.1 requires a company to tell the ASX the date of the general meeting and the closing date for the receipt of director nominations at least 5 business days before the closing date for receipt of nominations. However, failure to give such notice does not invalidate the meeting or the election of any director at the meeting.
Receiving a Director Nomination
Receiving a nomination in accordance with Listing Rule 14.3 does not trigger disclosure on the ASX. Disclosure of the nomination will be made as part of the notice of meeting for the upcoming AGM in the ordinary course.
Once a nomination is received, the company’s governance framework around director appointments will dictate next steps, in addition to the usual Corporations Act requirements i.e. execution of a consent to act as a director. A listed company’s governance framework for the appointment of directors is often summarised in its Corporate Governance Statement (CGS). The CGS is a useful resource that should outline the relevant background checks and due diligence to be completed for the appointment of a new director.
We would also expect to see the board committee responsible for director appointments (e.g. nomination & remuneration committee), or in its absence the board, consider the nominated candidate. This would involve a consideration of the nominee’s skills and experience against the board’s current composition, succession planning and skills matrix. Where it is warranted, we would encourage the chair of the board or board nomination committee to engage meaningfully with the nominee for an interview.
The board must exercise thoughtful judgment in the interest of all shareholders as a whole and document the assessment process and any rationale for the rejection of a nominated director, should the board decide not to support the nominee’s election at the upcoming AGM.
Meaningful engagement with the nominee could lead to the withdrawal of their nomination. The company should engage with the nominated director to ensure they have a clear understanding of their legal duties, liabilities, trading restrictions and the time commitment required for the role. The nominee could also meet with senior executives to address any specific concerns or questions about the company. This is particularly useful where there are special interest nominations focusing on a single subject matter such as climate change or modern slavery matters. Based on engagement with the nominee, the company could consider making a public statement to address any group or shareholder population that has a specific concern.
Annual General Meeting Requirements
We would expect to see procedural fairness applied to the election of a nominated director. In essence, what rights and privileges are afforded to other directors up for election should also be given to a director nominated for election.
As part of this process, the nominating director should be told what disclosures will be made in the notice of meeting, including any findings from background checks as well as the board’s recommendation on a director’s election. The nominee would then be allowed to provide a biography including a summary of their qualifications and experience for inclusion in the notice of meeting for the upcoming AGM. This process will provide shareholders with material information in the company’s possession relevant to making a decision on whether or not to elect a director.
At the AGM, the nominee will have an opportunity to address shareholders and respond to questions, which is equal to the opportunity given to other directors submitted for election or re-election.
Preparation in Advance of the Potential Director Appointment
The company should begin to organise a director’s appointment letter, a director’s access and indemnity agreement and an Appendix 3X (Initial Director’s Interest Notice) in preparation for the potential appointment. The Appendix 3X must be released to the ASX within 5 days of the appointment.