ASIC recently reviewed its guidelines on the disclosure obligations of public companies and of managed investment schemes concerning related party transactions. As a result, ASIC proposes to extend its guidelines.
Although the guidelines relate only to public companies and schemes, practitioners need to bear in mind how related party transactions are relevant to proprietary companies. So this article reviews the position for both public and proprietary companies.Maddocks Corporate and Commercial Team
ASIC’s Consultation Paper 142 sets out ASIC's views on how a company can comply with the Corporations Act 2001 when the company provides financial benefits to a related party. ASIC issued the Consultation Paper to seek public comments before it updates its Regulatory Guides on related party transactions, on the content of expert reports and on the independence of experts.
You can access a copy of the Consultation Paper here .
In certain circumstances, the Corporations Act requires public companies and responsible entities of managed investment schemes (an 'RE') to obtain member approval before giving a financial benefit to a related party.
A 'related party' of a public company or RE includes:
Examples of related party transactions include:
In developing the Consultation Paper, ASIC has provided its interpretation of the related party transaction provisions in the Corporations Act. ASIC’s objective as a regulator is to ensure investors are informed of, and make an informed decision about, such transactions. When incorporated into a Regulatory Guide, the content of the Consultation Paper will be the benchmark against which ASIC will assess related party transactions.
In particular, the Consultation Paper provides guidance on:
The related party transaction provisions only apply to public companies and REs.
However, below we also look briefly at the other requirements of the Corporations Act concerning related parties which proprietary companies need to be mindful of.
A public company or a RE is not required to obtain member approval in certain circumstances, including if the public company or RE and the related party are dealing at arm's length. The Consultation Paper describes arm's length transactions as a relationship in which neither party bears a special duty or obligation, and in which each party is acting uninfluenced and in its own interests.
What is arm's length?
In determining whether a transaction is at arm's length, a public company or RE's directors should consider:
If the directors do not have the knowledge or expertise to assess whether the transaction is at arm's length, then ASIC considers that they should obtain an independent expert report as discussed below. However, directors are still required to make an independent assessment of the report and transaction in order to comply with their duties under the Corporations Act .
What if the directors are unsure if a transaction is at arm's length?
ASIC thinks that if there is doubt about whether a transaction is at arm's length, then the directors should consider seeking member approval.
This is consistent with ASIC’s general position that companies and REs should seek member approval of all related party transactions unless an exception applies.
Sometimes, public companies and responsible entities may find it necessary to engage an independent expert to provide further information or clarification to directors and members about a related party transaction. In particular, ASIC considers that expert reports should be obtained where:
Independent experts must assess whether the transaction is 'fair' and 'reasonable'. If the expert report characterises the transaction as fair and reasonable, it is more likely to be at arm's length.
In addition to obtaining member authorisation for related party transactions, ASIC thinks that public companies and the responsible entities of managed investment schemes should disclose their previous related party transactions to the market.
In particular, ASIC's proposal is to ensure that all prospectuses, product disclosure statements and other disclosure documents of public companies or responsible entities include details of:
The policy behind extending disclosure obligations of public companies is to provide investors with sufficient information to make informed investments.
A side effect of this additional disclosure would be increased transparency among public companies and managed investment schemes, making information about all related party transactions (not just those the company or RE considers material) widely available.
In essence, this Consultation Paper sets out ASIC's position on how it will interpret and apply the Corporations Act in relation to related party transactions. However, as the Consultation Paper is open to public comment, ASIC invites any interested party to lodge submissions on their proposals to assist in developing policy in this area. Submissions must be received by 17 December 2010.
Transactions with related parties are still very relevant to proprietary companies. These companies are not obliged to comply with 'Chapter 2E – Related Party Transactions', but still must tread carefully when dealing with related parties, including in the circumstances set out below.
Section 191 and 192 – Disclosure of Directors' interests
Section 191 of the Corporations Act imposes a duty on all company directors to disclose to the other directors any 'material personal interest' they may have in a matter that relates to the affairs of the company.
Neither the Corporations Act nor relevant case law define the term 'material personal interest'. However, the threshold for determining whether an interest is a material personal interest is quite low. For example, if an interest would have the effect of influencing the way in which a director cast their vote on a particular matter, that interest could be considered material.
Under section 192, a director can give the other directors standing notice of their material personal interest. On giving standing notice, the directors would no longer be required to give notice each time their interests relate to company's affairs.
If notice is given to the other directors under section 191 or 192, then the Corporations Act permits the director of a proprietary company with a material personal interest to vote on matters that relate to that interest. However, as this provision is a replaceable rule, it may be amended by the company's constitution.
Part 2J.3 – Financial Assistance to acquire shares
Part 2J.3 of the Corporations Act deals with a company providing financial assistance to a person to acquire shares in the company or a holding company, which persons are often related to the company or its directors.
Section 260A authorises a company to give financial assistance to a person provided that:
In order to be approved by the shareholders, 75% of the votes on the matter must be in favour of providing financial assistance — with no votes being cast by the person obtaining the shares or their associates.
Otherwise, some of the exemptions from section 260A include:
Sections 588FB and 588FE – Uncommercial Transactions
Section 588FE sets out a number of circumstances in which a company's transactions may be voidable, such as when a company was insolvent and:
An uncommercial transaction is a transaction that a reasonable person would not have entered into, having regard to:
As a result, a transaction which disadvantages a company, or favours a director or other related party, may be voidable under these provisions up to 4 years after it was entered into.
For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Maddocks Corporate and Commercial Team.
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Julian Smith is a partner in the Maddocks Commercial team.
Julian advises extensively in the following areas:
Julian advises clients ranging from public companies servicing the wholesale financial services market to high net worth individuals and their advisers.
Julian has been with Maddocks since undertaking articles in 2001.
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