By Michael Mellon of Gadens Lawyers, Sydney
ASIC recently released its revised policy on related party transactions to assist companies and registered managed investment schemes with the disclosure requirements for related party transactions. Regulatory Guide (RG) 76 clarifies ASIC's views on these transactions and will help directors manage an appropriate response to these types of conflicts of interest.
What is clear is that ASIC expects directors to apply a more robust approach to related party transactions – and that RG 76 is meant to provide some real structure for directors.
Related party transactions involve an inherent conflict of interest because the related parties are in a position to influence the decision to give them a financial benefit and the terms on which it is given. This guide clarifies ASIC's views on:
- the arm's length exemption to the related party transactions;
- the disclosures required for members' meetings;
- the voting exclusions that are to be applied at the meetings; and
- disclosures that should be made in other types of disclosure documents.
Who are related parties and what is a related party transaction?
Under the Corporations Act a related party transaction involves a financial benefit being given to a related party. A related party may be a company that controls another company; a director, their spouse and certain other relatives. Time also plays a role in determining who is a related party – a related party may be a person who was involved in the previous six months and if there are reasonable grounds someone will become a related party in the future, then that person is also a related party.
So, if there is a related party transaction it must be approved by members of the company or scheme, unless one of the exceptions applies. The main exception is that the financial benefit is given on arm's length terms.
Arm's length transactions
The simple response for directors when considering a related party transaction is to rely on the "arm's length" exception. This enables the transaction to be approved, without the need for seeking member approval.
Unfortunately, it's not as simple as that. ASIC makes it clear that directors should be prudent and confident when relying on this exception. All too frequently directors inappropriately apply and rely on this exception.
Directors should consider the following factors in determining if a transaction is at arm's length:
- how the terms of the transaction compare with those of any comparable transaction on an arm's length basis;
- the nature and content of the bargaining process;
- the impact of the transaction on the company or the scheme;
- any other options available to the entity; and
- any expert advice received.
ASIC has made it clear that where there are potential conflicts of interest there is a heightened obligation on directors to seek member approval. These obligations are in addition to the general directors' duties and the responsible entity duties outlined in other parts of the Corporations Act. Responsible entities also need to cover off their requirement to manage conflicts adequately by properly documenting why they relied on the arm's length exception (because of the requirement to manage conflicts adequately). [s.912A(1)(aa) and RG 181 – Licensing: Managing Conflicts of Interest)].
Finally, ASIC has made it clear that where there is any uncertainty as to whether the arm's length exception applies, member approval should be sought.
Disclosures required for members' meetings
If an exception does not apply, the members will need to vote in favour of the related party transaction. RG 76 provides some helpful guidance on what level of disclosure is required for the notice of meeting and explanatory statement materials that will be sent to members.
Meeting disclosures to members are not just the obvious items that should be included, but will need to address these items too:
- the identity of the related party;
- the nature of the financial benefit;
- alternative options to the related party transaction and reasons for choosing the related party transaction;
- the impact of the transaction on the entity; and
- directors' recommendations and the directors' interests in the outcome.
Sometimes it is appropriate to value the financial benefit and to engage an independent expert to provide an opinion. Experts may be required where the financial benefit is difficult to value, it is a significant transaction or where the non-conflicted directors don't have the expertise to provide valuation advice to the members. The expert's report may also be required under Chapter 10 of the ASX Listing Rules.
While ASIC requires 14 days to review all meeting materials to be sent to members, it may shorten this period. ASIC will require that the disclosures are in full and that they are clear, concise and effective. These are similar requirements for offer documents, take-over bids or explanatory statements.
Voting exclusions - member meetings and directors' meetings
A related party or an associate of a related party is excluded from voting on the resolution at the member meeting and ASIC have made it clear that it will only give relief to this exclusion in limited circumstances.
ASIC has given some clear guidance on the voting exclusion for responsible entities. Normally the responsible entity and its associates are restricted from voting on a resolution in which they have an interest. The courts have held a narrow interpretation of section 253E of the Corporations Act and ASIC suggests that the responsible entity may be excluded from voting on a resolution when it holds the interest in the scheme on behalf of another scheme.
ASIC has also provided guidance on how directors are to vote at directors' meetings – particularly where they may have a personal interest in the outcome of the resolution which may approve the related party transaction or decide that it should go to a vote of the members.
All investors should be given adequate disclosures about related party transactions so that investors are fully informed when buying securities or interests in schemes. The disclosures should explain how the related party transactions affect the entity and the risks associated with them. Disclosures won't be required where:
- the disclosure confuses investors by dealing with inconsequential matters; or
- where there have been previous disclosures and it's not reasonable to repeat the disclosures in full.
ASIC's RG 76 will help directors with the management of related party transactions and the conflicts that these types of transactions create. It is a helpful and practical guide, and timely for all directors who are faced with increased attention regarding their corporate governance practices.
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