The Australian Securities and Investments Commission (ASIC) today announced a campaign to crack down on related party disclosure documents, to ensure that shareholders receive sufficient information to make a decision about whether to grant related party benefits.
Related party benefits are when a public company provides a financial benefit to a person or group that are not ‘at arms length’ from the company.
‘Our ongoing review of related party documents has shown that companies are not providing sufficient information to shareholders to enable them to make an informed decision on related party transactions’, said Mr Malcolm Rodgers, ASIC’s Executive Director, Policy and Markets Regulation.
Mr Rodgers reminded directors that it is their responsibility to get the disclosure right.
‘ASIC has previously warned about the common defects found in related party documents (see background) but the documents lodged with ASIC continue to include these defects’, Mr Rodgers said.
‘As part of our new campaign, we will be issuing a comment letter to the company whenever our review of related party documents reveals one or more of the common defects that we have identified as key concerns’, he said.
The company is then required to circulate ASIC’s comment letter to shareholders with the related party documents. The comment letter will also be available from ASIC’s company database.
However, as soon as ASIC detects one of the common defects, the company will be given the opportunity to withdraw the document. The company will then need to re-lodge amended documents if it wishes to hold the proposed shareholders’ meeting.
‘ASIC will no longer allow companies to amend documents after we have identified defects. We are placing the responsibility on companies to ensure that all of the information relevant to the related party transaction is available to shareholders in the disclosure document from the start’, Mr Rodgers said.
Background
Under the Corporations Act 2001 (the Act), for shareholders to be able to vote on a related party transaction, the company must provide shareholders with a notice of meeting and explanatory statement that sets out certain information. At least 14 days before the public company intends to send the related party documents to shareholders, the documents must be signed by a director or company secretary and lodged with ASIC. ASIC then has 14 days in which to review the related party documents.
If ASIC considers that the documents do not provide adequate disclosure to shareholders, it can issue a comment letter that the company is required to distribute to shareholders, along with the related party documents.
Common defects
(For more information see Media Releases 04-206 and 03-232.)
Valuations: The most commonly occurring defect is that the financial benefit is not valued adequately, including where the financial benefit is equity related, such as the issue of shares, options or convertible notes, or where it involves the sale or purchase of an asset, such as a mining tenement or an existing business. An adequate valuation requires the basis of the valuation and the principal assumptions behind the valuation to be disclosed, and in some circumstances it may be necessary to provide a valuation by an independent expert.
It may be necessary where a company is purchasing an asset from a related party in exchange for shares to include both a valuation of the asset and a valuation of the shares. Where relevant, the valuation methodology should be consistent with that required to be adopted in the financial reports of the company
Directors’ emoluments: The total remuneration package must be disclosed to shareholders where the proposed benefit is to be given by remuneration or an incentive. Shareholders must be able to assess the value of the overall remuneration package the director will receive when taking into account the financial benefit to be conferred.
Identifying the related party: The related party to receive the financial benefit must be clearly identified.
Financial benefit: Complete details of the financial benefit to be given to the related party must be provided to the shareholders, including not only details of what the benefit is (both type and amount), but also the reason for giving the benefit and the basis for giving the particular benefit.
Related party's existing interest: It may be necessary to include details of the related party’s existing interest in the company. For example, where shares or options in the company are to be granted to a related party, that party’s existing interest will be relevant as it allows the shareholders to determine the likely extent of the related party's influence or control if the financial benefit were to be granted.
Dilution effect of transaction on existing shareholders' interests: Where a company intends to provide equity related financial benefits to a related party, ASIC requires the company to state the possible dilution effects of that issue on the shares held by other shareholders, or provide sufficient information for shareholders to calculate the dilution effect themselves, provided that a statement to the effect that dilution will occur is also made.
Trading history: For equity related financial benefits, details of the trading history of the relevant equity, for example the company’s shares, should be included for the preceding 12-month period. This information should include the lowest and highest prices the equity traded at in the relevant 12-month period. It should also include the most recent closing price.
Directors’ recommendations and interests in outcome: The Act requires each director to make a recommendation as to the proposed resolution, or to state why they have not made a recommendation and to give details as to any interest the relevant director may have in the outcome of the proposed transaction.