Setting the standard on related party disclosure

Chapter 2E of the Corporations Act 2001 (Cth) requires that public companies obtain shareholder approval before giving a financial benefit to a related party, unless a particular exemption exists. ASIC has recently released Regulatory Guide 76 – Related Party Transactions (RG 76) which provides guidance for directors of public companies (and of responsible entities of registered managed investment schemes) when considering entering into a related party transaction. In ASIC’s view, RG 76 reflects the current state of the law and should form the basis of market practice for making decisions when it comes to giving financial benefits to related parties.

Often, one of the first decisions made in relation to related party transactions is whether the transaction is conducted on arm’s length terms. Belinda Gibson, ASIC’s deputy chair, indicates her belief that this exception is too often relied on. She states that “directors should be confident that a transaction is genuinely on arm’s length terms... it is insufficient for directors to rely on the exception if it is merely arguable”.

In RG 76 ASIC sets out a number of factors that it recommends directors of a public company consider “all of” when deciding if a related party transaction is at arm’s length. These include comparing the terms of the transaction with a similar arm’s length transaction, investigating other options and/or obtaining expert advice and examining the nature and content of the bargaining process. ASIC considers a lengthy and “hard” negotiation is more likely to indicate that a transaction has been negotiated at arm’s length. If the directors are uncertain as to whether the transaction is on arm’s length terms, RG 76 recommends that shareholder approval is sought.

The Corporations Act contains a number of requirements for the calling of a shareholders’ meeting (including the contents of the notice) to approve related party financial benefits. RG 76 sets out the material ASIC considers would be expected to be included in the notice on the basis it would be likely to influence a voting decision, including the reasons why the directors decided that the transaction was not on arm’s length terms.

A key focus of RG 76 is disclosure, ensuring that the relevant parties are provided with the information needed to make relevant decisions. ASIC indicates that it is not sufficient that shareholders be provided with the value of the financial benefit but that as far as possible, information be included that assists the shareholder to determine the impact of the giving of the financial benefit on the company (in dollar terms) and the particular circumstances in which the financial benefit is to be given. ASIC has suggested this area is one where independent expert’s reports (similar to those used in takeovers) could be more utilised, particularly where the directors are unable (due to a lack of expertise or resources) to provide independent advice on the transaction to the shareholders. Further details of the contents of expert reports are contained in separate regulatory guides (RG 111 and RG 112), however ASIC expects that experts would be able to provide a valuation of the financial benefit and advice as to whether they considered a particular transaction to be fair and/or reasonable.

RG 76 also specifies certain related party transaction information that ASIC considers should be included in disclosure documents such as product disclosure statements. ASIC considers that related party transactions, either by themselves or when combined with other transactions (even if they have been entered into previously), may be a matter having a material influence on persons deciding whether to acquire a particular product and on that basis should be fully disclosed.

In light of the recent history of high profile corporate collapses, ensuring that stakeholders are given the information required for them to make an informed decision has been a particular focus of ASIC. The release of RG 76 provides a further indication of the attention ASIC is giving to related party transactions. Public companies (and responsible entities) that are contemplating giving related party benefits would be well advised to become familiar with RG 76 and ensure that in the interests of good governance, related party transactions align with ASIC’s suggested “market practice”. Copies of RG 76 and RG 111 and 112 (Expert Reports) may be found at here.

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Dan Pearce, Partner
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