A public company that provides a "financial benefit" to a related party (such as a director or a person who controls the company) needs to first get the approval of its shareholders unless it fits within an exemption in the Corporations Act.

Faced with a related party transaction, public companies often try to wriggle themselves into the tight-fitting but always very attractive "arm's length transaction" exemption. The Corps Act doesn't give a whole lot of guidance as to what is "arm's length". It simply says that arm's length terms are those which are "reasonable in the circumstances if the public company and the related party were dealing at arm's length." Clear as mud.

Are public companies properly considering whether related party transactions are truly on "arm's length terms"? Or are they getting maybe a little too close to their relatives?

ASIC's in the latter camp, and so has released a checklist of things to take into consideration before public companies can rely on the "arm's length terms" exemption. The checklist includes matters like how the negotiations for the transaction were undertaken, and the impact of the transaction on the company.

If, after consideration is given to each factor (and we mean proper consideration, not just a cursory nod), there is the smallest bit of doubt about whether the arm's length exemption applies to the transaction, then you have to go to shareholders for approval.

What does this mean?

The guidance from ASIC is helpful, because:

1.it helps to clarify what "arm's length terms" actually means; and

2.it will likely encourage greater shareholder interest in related party transactions (which, from a corporate governance perspective, is a really good thing).Directors of public companies should consider also ASIC's guidance on related party transactions. Failure to properly assess whether a related party transaction is on "arm's length terms" may open directors to civil and criminal liability.

As a shareholder, would you really want your company to provide direct finance to a director without you knowing about it, or at least being given a chance to look at the terms of the deal? Nope, thought not.

Any questions? Just ask.

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