Annual general meetings are a convenient time to get shareholder
approval for related party transactions (such as the issue of
securities to directors).
For that reason, ASIC has used the upcoming AGM season to renew
its warnings about the information provided to shareholders before
such a vote.
In a recent statement, the Commission reminded companies of
what it looks for when examining explanatory materials for a
related party benefit vote.
Related party benefits must generally be approved by
shareholders of public companies unless they constitute reasonable
remuneration or are on arm's-length terms. There is no bright
line test for what constitute reasonable remuneration or
arm's-length terms. As a result, many companies opt for the
"whitewash" option of shareholder approval.
An essential component of that whitewash procedure is giving
shareholders an explanatory statement about the proposed benefit.
The explanatory statement must be lodged beforehand with ASIC. If
the Commission has adverse comments about the adequacy of the
explanatory statement, the company must send those comments to the
What does ASIC look for?
In its statement, ASIC drew particular attention to a number of
what it has described as "common defects" in related
party explanatory statements:
valuation of the financial benefit - whether securities or
assets - is a recurring theme. In ASIC's view, an adequate
valuation requires disclosure of the basis of the valuation and the
principal assumptions behind the valuation. In some circumstances
it may also be necessary to provide a valuation by an independent
expert. If the company is purchasing an asset from a related party
in exchange for shares, it may be necessary to include valuations
of both the asset and the shares.
The related party who is to receive the financial benefit should
be clearly identified.
The details of the financial benefit should
include not only the type and amount of the benefit, but also the
reason for giving the benefit and the basis for giving the
Shareholders should be told of any interest that the
related party already has in the company. This would allow
them to determine the likely extent of the related party's
influence or control if the financial benefit were to be
Shareholders should also be told if the benefit may have
"dilution effects" on them. If there is
a possible dilution effect, it should be set out or shareholders
should be given sufficient information to allow them to calculate
the effect themselves.
If the financial benefit is equity related, shareholders should
be provided with the trading history of the
relevant equity for the preceding 12 months. This information
the lowest and highest prices the equity traded at during those
12 months; and
the most recent closing price.
ASIC has expressed concern about inadequate compliance with the
Corporations Act requirement for each director to make a
recommendation as to the proposed resolution (or
to state why they have not made a recommendation) and to give
details as to any interest the relevant director may have in the
outcome of the proposed transaction.
Another ASIC concern is that the recipient's total
remuneration package should be disclosed where the
proposed benefit is to be given by remuneration or an
Given its central role in the process, ASIC's list of
concerns is essential reading for any company contemplating
shareholder approval for a related party benefit.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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