On 30 March 2011, the Australian Securities and Investments Commission (ASIC) issued its revised Regulatory Guide 76 Related party transactions (RG76) setting out guidance to public companies and responsible entities of managed investments schemes of their disclosure requirements regarding related party transactions.
Intended purpose of the Regulatory Guide
RG 76 aims to encourage transparency and best practice in the market with regards to informed decision making. ASIC seeks to promote:
- consistent market practice for the application of the arm’s length exception from the requirement to seek member approval
- informed decision making by members of public companies and registered schemes for related party transaction disclosure, and investors considering new or a changed levels of investment in entities that have established arrangements with related parties, and
- clarity in procedures under the Corporations Act 2001 (Cth) (Act) for directors’ meetings and members’ meetings.
Directors’ voting restrictions
RG76 covers voting restrictions in directors’ meetings and various key decision making considerations including:
- whether to enter into a related party transaction
- whether to seek member approval
- what to include in the notice of meeting and explanatory statements (meeting materials) if member approval is sought
- which votes to count at a members’ meeting, and
- what to include about related party transactions in other disclosures.
The arm’s length exception
Under Chapter 2E of the Act, unless an exception applies, a public company or responsible entity must obtain member approval to give a financial benefit to a related party. The most frequently used exception to the member approval requirement is where the transaction with a related party is made on terms that are considered reasonable if the parties were dealing at ‘arm’s length’.
As a result of a recent review of related party transactions, (and as there is no definition in the Act as to what an arm’s length exception is), ASIC have included in RG76, a detailed checklist of considerations that public companies and responsible entities need to evaluate when determining whether this exception applies.
These consideration points are as follows:
- Comparable transactions
ASIC considers a good indicator of arm’s length terms is to consider how the terms of the overall transaction compare with those of a comparable transaction completed between unrelated parties in a contract for legitimate commercial bargain. Particularly, ASIC suggests being alert to key provisions and terms that appear excessively onerous or generous and are therefore less likely to be considered reasonable.
- Nature of the bargaining process
The nature and content of the bargaining process, including how the transaction was initiated, structured, negotiated and disclosed to directors is relevant to determine whether the terms of the related party transaction are arm’s length. ASIC does not consider it necessary to show that the parties negotiated on an arm’s length basis to decide the terms. However factors relating to how the parties conducted themselves in forming the terms are relevant in deciding whether the outcome of negotiations could reasonably have been achieved by uninfluenced, self-interested parties in the circumstances.
- Impact of the transaction
RG76 suggests considering the impact of the transaction on the company or registered scheme such as:
- whether there is a negative effect on the company’s or registered scheme’s financial position or performance that is not balanced by the positive effects
- whether the transaction fits within the business plan of the entity, and
- whether the terms are fair, given the expected return on the relevant asset.
- Alternative options available
It is a relevant consideration as to whether the related party transaction is one of a number of options open to the entity, and whether it is the most favourable option.
Directors should ensure they have access to sufficient knowledge or expertise to assess all aspects of proposed related party transactions.
Member approval process
If a related party transaction requires member approval under Chapter 2E of the Act, entities must lodge the material that will be put to members with ASIC. In some circumstances it may be necessary for entities to include a valuation from an independent expert with a notice of meeting and explanatory statement. Meeting materials must be lodged with ASIC at least 14 days before the notice convening the meeting is given to members.
The explanatory statement for the approval of financial benefits must contain information detailing:
- the identity of the related party
- the nature of the financial benefit
- directors’ recommendations
- directors’ interest in the outcome (if any)
- a valuation of the financial benefit
- disclosure of a relevant directors’ total remuneration package
- the related party’s existing interest (if any)
- dilution effect of the transaction on existing members’ interests (if applicable), and
- any other reasonably required information.
Independent expert reports
RG76 includes examples whereby ASIC will now expect an independent expert report (with a notice of meeting) to be provided to members, such as where:
- the financial benefit is difficult to value
- the transaction is significant from the point of view of the entity
- the non-interested directors do not have the expertise to provide independent advice to members about the value of the financial benefit
- it is required under Chapter 10 of the ASX Listing Rules, or
- if the related party transaction is also a control transaction for which the entity is commissioning an expert report.
Information about related party arrangements is information investors reasonably require in order to make informed decisions about whether to acquire securities or managed investment products, and therefore ASIC indicates this should be included in disclosure documents.
Disclosure about related party transactions should therefore be made in a manner that ensures that investors understand how the transaction affects the entity overall and the associated risks and benefits.
RG76 provides that disclosure documents should describe:
- all related party transactions as well as the financial benefit of the transaction
- the nature of the relationship with the related party
- whether the arrangement is on arm’s length terms or another Chapter 2E exception applies
- whether member approval for the transaction has been sought, and if so, when
- the risks associated with the related party transaction, and
- the policies and procedures that the entity has in place for entering into related party transactions, including how compliance with these policies and procedures is monitored.