Australia: Related party transactions on ASIC's radar

Last Updated: 12 April 2011
Article by Adam Levine
  • Release of a comprehensive revision of Regulatory Guide 76 suggests that ASIC will be keeping a close eye on related party transactions.
  • ASIC warns directors not to rely on the arm's length exception unless they are persuaded that the exception does apply, rather than it being merely arguable that it applies.

ASIC has released a comprehensive revision of Regulatory Guide 76: Related Party Transactions – which suggests that the regulator will be keeping a close eye on these types of transactions.

The aim of Regulatory Guide 76 is to promote better disclosure and governance for "related party transactions" which are transactions through which a public company or registered managed investment scheme provides a financial benefit to a related party. Given that a related party includes not only related companies but also directors, their spouses and certain other relatives, the related party provisions of the Corporations Act can cover a wide variety of transactions.

Generally a public company or a registered scheme has to obtain member approval for a related party transaction. One of the key exceptions to this requirement is the arm's length exception, which is available if the transaction is on terms that would be reasonable if the parties were dealing on arm's length terms.

Regulatory Guide 76 provides guidance on many aspects of related party transactions including:

  • the conduct of directors' and members' meetings to consider and approve related party transactions
  • when the arm's length exception can be relied on to avoid having to obtain member approval
  • the member approval process
  • guidance as to the information about related party transactions, that should be included in disclosure documents such as prospectuses.

The arm's length exception

Directors can face a difficult job when assessing whether this exception applies and the revised Regulatory Guide will provide welcome assistance for directors. However, ASIC warns that "directors should only rely on the exception when they are persuaded that the exception does apply, rather than it being merely arguable that it applies."

It seems likely that ASIC will pay closer attention to related party transactions in the future so great care should be taken when relying on the arm's length exception.

What are ASIC's views?

ASIC has identified a number of factors that it expects directors to consider when determining whether the arm's length exception applies. At a minimum, directors should consider the following factors:

  1. Are the terms of the related party transaction comparable with those of a similar transaction, in similar circumstances between unrelated parties for a legitimate commercial bargain?
  2. Did the parties treat each other as unrelated parties during the bargaining process? The following factors are indicative of negotiations being conducted on arm's length terms:
    1. formal documentation of the agreement
    2. the involvement of professional advisors in the bargaining process
    3. whether there was a genuine process of "real" bargaining
    4. whether directors with a material personal interest have been involved, or privy to the bargaining process.
  3. Were the short and long term impacts of the transaction on the company or registered scheme's business plans considered?
  4. Were there any alternative options available to the entity that could provide a comparison of terms that could be reasonably obtained between unrelated parties?
  5. Whether the directors had access to enough knowledge or expertise to assess all aspects of the related party transaction. This may require the directors to obtain expert advice.

The above list of factors is not determinative and directors will have to consider whether any other factors apply. Directors will also have to determine what weight should be given to each factor but ASIC has warned that any assessment of whether a transaction is on arm's length terms should not be based on a single factor in isolation from other factors.

Member approval process

Regulatory Guide 76 now provides more guidance on the process for obtaining member approval for related party transactions. It specifies the nature of the information that should be provided to members, including information about the circumstances in which the financial benefit is given, the directors' recommendations and reasons for them, alternative options and the impact of the transaction. Where possible, members should be able to understand the value of the financial benefit in dollar terms.

ASIC also encourages expert reports to be obtained if the financial benefit is difficult to value, the transaction is significant or the directors who are not interested in the transaction do not have the expertise or resources to advise members about the financial benefit.

How we can help

Please contact us for more information on how this new Regulatory Guide may impact on any transactions that you may be considering.

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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