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
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
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,
Any questions? Just ask.
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