ASIC’s Consultation Paper 142
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 .
What is a related party transaction?
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:
- a company that controls the public company or RE;
- any director of the public company or RE or of the company that controls the public company or RE;
- the spouses, parents and children of those directors; and
- any entity controlled by any of the entities or persons listed above.
Examples of related party transactions include:
- issuing shares, options or other securities to directors of a public company; and
- entering into an arrangement with a company owned by a director's family on terms favourable to the family company.
The Consultation Paper – Summary
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:
- how to determine whether a transaction is at 'arm's length';
- when to obtain an independent expert report; and
- how information about related party transactions is circulated to both current and potential investors.
Who is affected by the changes?
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.
Are there any exceptions?
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:
- whether the terms of the transaction are similar to those completed in similar circumstances between unrelated parties;
- the nature and content of the negotiation process;
- the short-term and long-term implications of the transaction on the company or RE; and
- whether there was another viable alternative to entering into the related party transaction.
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.
When should an independent expert report to be commissioned?
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:
- the transaction is significant from the point of view of the company, such as where the transaction involves a significant change of business activities or the replacement of the full board;
- the financial benefit is difficult to value;
- the non-interested directors do not have the expertise or resources to provide independent advice to members about the value of the financial benefit; or
- in specified corporate takeover circumstances.
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.
Further disclosure requirements
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:
- all related party arrangements (including their value);
- the nature of the relationship;
- whether the arrangement is at arm's length;
- whether member approval was sought; and
- the company or entity's policies and procedures for entering into related party transactions.
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.
When do submissions on the Consultation Paper close?
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.
What about proprietary companies?
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:
- giving the assistance does not materially prejudice the interests of the company or its shareholders or the company's ability to pay its creditors;
- the assistance is approved by the shareholders; or
- the assistance is exempted.
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:
- an exemption if the shares are party paid and subject to a lien;
- a situation where the company enters into an agreement under which the person acquiring the shares may make payments for the shares; and
- if the shares are issued under an approved employee share scheme.
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:
- the transaction was uncommercial; or
- a related entity of the company was party to it.
An uncommercial transaction is a transaction that a reasonable person would not have entered into, having regard to:
- the benefits to the company of entering into the transaction;
- the detriment to the company of entering into the transaction;
- the respective benefits to other parties to the transaction of entering into it; and
- any other relevant matter.
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.
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