Disclosure to shareholders about related party transactions ASIC Report

If your public company wants to make a "non-arm’s length" transaction with a related party, you must get shareholder approval first. 

This is because the transaction moves a financial benefit from the company on the basis of say non-standard contract conditions or lower-than-market prices, to related parties (eg the company’s directors or to other entities controlled by the directors).

Disclosure to shareholders about related party transactions

If your public company wants to make a "non-arm's length" transaction with a related party, you must get shareholder approval first. This is because the transaction moves a financial benefit from the company on the basis of say non-standard contract conditions or lower-than-market prices, to related parties (eg the company's directors or to other entities controlled by the directors).

As a director, you must ensure that your disclosure documents to shareholders have all the information a shareholder would reasonably require to decide how to vote on such a sensitive transaction.

To help you with your shareholder disclosure for this type of transaction, follow our pointers below and see how your disclosure measures up. These pointers come from the findings of our recent campaign, which identified defects in company disclosure to shareholders for related party transactions.

Disclose your recommendation and interest in the outcome

For each proposed related party resolution, you (and the other directors) must either:

(a) make a recommendation about the resolution - it is essential that you state your reasons for it (it's not enough to simply state you approve of the resolution), or

(b) if you don't make a recommendation, state why not.

If, for some reason, you're not available to make either of these statements, you must also state why.

You must also state whether or not you have an interest in the outcome of the proposed resolution. If you do, you must state what that interest is.

Value the financial benefit adequately

If the financial benefit is the issue of shares, options or convertible notes, or if it involves the sale or purchase of an asset, such as a mining tenement or an existing business, you must value it adequately.

This means you must disclose the basis of the valuation plus the principal assumptions behind the valuation. In some circumstances, you may need to organise a valuation by an independent expert. This is particularly important where there is a possibility of directors having a conflict of interest in the transaction.

If the financial benefit involves options, follow our existing guidelines on valuation from our Media Release 04-206 "Valuing options for directors and executives".

If your company is purchasing an asset from, or selling an asset to, a related party, you must include a valuation. If your company is purchasing an asset from a related party in exchange for shares, you may need to include both a valuation of the asset and a valuation of the shares. Where relevant, the valuation methodology used should be consistent with that required for the company's financial reports.

Give complete details of the financial benefit

You must give shareholders complete details of the financial benefit, including:

• what the benefit is (both nature and quantity)
• the reason for giving the benefit, and
• the basis for giving the particular benefit.

For example, if options are to be granted to a director in your company, we expect your company to:

• disclose the number of options to be granted to the director
• disclose the terms of the options
• explain why the options are to be granted, particularly where alternative forms of remuneration or incentive may be required to be expensed by the company in future years; and
• explain why the specified number of options is to be granted.

So if your company proposes to give 1 million options to Director X, it must state both the reason why the options are being given and why that amount and value of the options was chosen.

Disclose the total remuneration package

Where the financial benefit is remuneration or an incentive to a director, the amount of the total remuneration package must be disclosed to the shareholders.

For example, if your company grants options to director Y, your company must provide a proper valuation of those options and give shareholders details of other remuneration director Y will receive, to enable the shareholders to assess the value of the director's overall remuneration package.

It is not usually sufficient to only include past remuneration of directors. But if the remuneration a director will receive is not known but is expected to be similar to that received in the previous year, it may be sufficient to include the previous year's remuneration and a statement to that effect.

Our campaign

ASIC's campaign targeted eight areas of disclosure where the quality of information in related party documents sent to shareholders continues to be defective. Apart from the areas we touched on above, we also looked at disclosure of:

• the description of the related party
• the related party's existing interests in the company
• the dilution effect of the transaction on existing members' interests, and
• the trading history of the relevant equity, including highest, lowest and most recent closing price.

What happens when we find a disclosure defect

As outlined in our Media Release 04-257, ASIC no longer permits companies to amend documents after we've identified defects.

After we find a common defect, the company will receive a comment letter from us, under section 220 of the Corporations Act 2001. The company must then circulate this comment letter to shareholders along with the related party documents.

But before we issue the comment letter, we will give the company an opportunity to withdraw the documents, rectify them and re-lodge them.

For copies of media releases 05-63, 04-257 and 04-206, visit our website at www.asic.gov.au/publications

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.