The two-strikes rule on remuneration reports explained

The two strikes rule is a shareholder accountability mechanism in Australian corporate law that lets investors in listed companies challenge a board over executive pay. In short: if at least 25% of votes cast at an annual general meeting (AGM) are *against* adopting the company's remuneration report in two consecutive years, shareholders must then vote on whether to "spill" the board — that is, force the directors to stand for re-election. It is the practical teeth behind the otherwise non-binding advisory vote on executive remuneration.

The rule was introduced by the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 and now sits within the Corporations Act 2001 (Cth), administered by the Australian Securities and Investments Commission (ASIC). For the underlying compliance duty and reporting requirements, see the two-strikes remuneration report obligation.

What the two strikes rule is

Each year, the directors of a listed company must put their remuneration report to shareholders for adoption at the AGM. That vote is advisory — a company is not legally bound to change anything if shareholders vote no. The two strikes rule supplies the consequence that the advisory vote otherwise lacks.

A "strike" is recorded when 25% or more of the votes cast on the remuneration report resolution are against adoption. Two strikes in successive AGMs do not automatically remove directors; instead, they trigger a further vote — the spill resolution — that puts the board's tenure directly in shareholders' hands.

The design intent is to give shareholders a structured escalation path, and to create reputational pressure on boards to engage with investors on pay before matters reach a spill.

Who the rule applies to

The rule applies to disclosing entities that are companies — in practice, companies listed on a financial market such as the ASX that are required to prepare and put a remuneration report to members. It is part of the broader directors accountability framework.

It does not apply to:

• Companies that are not required to prepare a remuneration report (most proprietary/unlisted companies).
• Resolutions other than the remuneration report adoption vote.

If you are unsure whether your entity must prepare a remuneration report, confirm your obligations against the Corporations Act and current ASIC guidance, as the reporting requirements interact with your status as a listed disclosing entity.

The first strike

A first strike occurs at an AGM when at least 25% of votes cast oppose adoption of the remuneration report.

Consequences of a first strike:

• The vote remains advisory — directors are not removed and nothing is automatically changed.
• The company must, in the following year's remuneration report, explain how it has responded to shareholder concerns (including whether the board took the previous year's vote into account and, if not, why not).

A first strike is best understood as a formal warning. It puts the board on notice and obliges a written, public response in the next report. Many boards treat a first strike as a trigger for direct engagement with major shareholders and proxy advisers ahead of the next AGM.

The second strike and the spill resolution

A second strike occurs if, at the *next* AGM, the remuneration report again attracts a no-vote of 25% or more.

When a second strike is recorded, a further resolution must be put to the meeting — the spill resolution — asking shareholders whether a separate "spill meeting" should be held at which the board will face re-election.

If the spill resolution fails (50% or less in favour), no spill meeting is held and the board continues. If it passes, the company must convene a spill meeting.

Voting restrictions and the spill meeting

A central feature of the rule is that key management personnel (KMP) named in the remuneration report — and their closely related parties — are generally restricted from voting their shares on the remuneration report resolution and on the spill resolution. This prevents the people whose pay is under scrutiny from using their own holdings to defeat shareholder accountability. There are limited exceptions, such as where a shareholder directs an independent chair (or another proxy) how to vote and the relevant conditions are met.

Getting proxy and voting-exclusion mechanics right is one of the more technical compliance points: errors in how KMP votes are excluded, or how undirected proxies are handled, can expose a meeting result to challenge. Review proxy form wording and voting-exclusion statements carefully against the Corporations Act requirements.

If the spill resolution passes, the company must hold the spill meeting within 90 days of the AGM at which the second strike and spill resolution occurred. At that meeting, directors who were in office when the relevant remuneration report was approved by the board, and who remain directors, must stand for re-election (subject to the rules on which directors are caught and any requirement to retain a minimum number of directors). In practice, the threat of a spill meeting — and the cost, disruption and reputational exposure it brings — is often a stronger driver of board behaviour than the spill meeting itself, which remains comparatively rare.

What boards and shareholders should do

For boards and company secretaries:

• Engage early. After a first strike, consult major institutional shareholders and proxy advisers well before the next AGM; do not wait for the next report.
• Respond substantively. Use the mandatory "response" section of the next remuneration report to show genuine consideration, not boilerplate.
• Check the mechanics. Confirm voting-exclusion statements, proxy wording and the count methodology so a contested result holds up.
• Plan for the contingency. Have a spill-meeting timetable ready so the 90-day window is achievable.

For shareholders and investors:

• A first strike is a signal to scrutinise the board's response in the following year.
• Remember that a spill resolution needs more than 50% support to pass — a far higher bar than the 25% needed to record a strike.

Common pitfalls

• Confusing the thresholds. A *strike* is recorded at 25%; the *spill resolution* passes only above 50%. They are different votes with different bars.
• Treating a strike as removal. A strike never removes a director by itself — it is the two-year sequence plus a successful spill vote that leads to re-election.
• Mishandling KMP votes. Failing to correctly exclude KMP and closely related parties is a frequent and avoidable error.
• Weak first-year response. A perfunctory response to a first strike materially raises the risk of a second strike from proxy advisers.
• Assuming the rule applies to all companies. It is confined to listed entities required to prepare a remuneration report.

Because thresholds, voting exclusions and the directors caught by a spill turn on the precise wording of the Corporations Act, verify the current provisions and any updated ASIC guidance before acting in a contested situation.