Duties of directors in related- party transactions

Related-party transactions have long been a feature of corporate life in Australia. Almost by definition, those transactions involve conflicts of interest because the related party is usually in a position to influence whether the benefit should be conferred, and on what terms.

According to Jonathan Milner, partner, and Amelia Smith, senior associate at Arnold Bloch Leibler, it is therefore not surprising, that related-party transactions are heavily regulated by provisions in both the Corporations Act and the ASX Listing Rules. These are designed to limit a conflicted director's influence on a company's decision to enter into a transaction and on the transaction itself.

Given the high levels of regulation, even experienced company directors may therefore assume that related-party transactions can be undertaken in a relatively "risk-free" way provided the company complies with the statutory regime and puts in place appropriate protocols to protect the company from the influence of the conflicted director.

However, this assumption is misplaced, write Milner and Smith. They argue that there are a string of cases that suggests that even when a conflicted director discloses his or her interest in the transaction and the company complies with the statutory regime, the conflicted director may still owe a residual duty at general law to act in the company's best interests in the transaction as opposed to his own.

The difficulty for directors is self-evident, says Milner and Smith. On one hand, the statutory regime is designed to ensure that a conflicted director has no influence on the company's decision-making. On the other hand, the director's general law duties may require him to act proactively in the company's interests where those interests are, by definition, irreconcilable with his or her own.

In reality, the only risk-free approach is for a director to avoid related-party transactions altogether, they say. In the meantime, however, a "conflicted" director participating in a related-party transaction should at the very least:

  1. Disclose the director's interest in the transaction in writing to the board.
  2. Satisfy him or herself that the company has retained competent independent professional advisers.
  3. Ensure that the company has in place detailed related-party protocols that reflect the requirements in the statutory regime.
  4. Ensure that the director and the executives reporting to the director are not involved in the negotiation of the transaction on the company's behalf.
  5. Not advocate in favour of the transaction internally, participate in deliberations on the merits of the transaction or vote on the transaction.
  6. Ensure that the transaction will be assessed by the company's related party committee before being recommended to the board.