In brief
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Of particular interest is ASIC’s guidance on the meaning of the arm’s length exception and its expectations on the content of the explanatory statement where member approval is required.
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Boards and fund managers should review the new guidance and consider whether, in light of the guidance, their related party and conflict management protocols are adequate.
The arm’s length exception
Generally, a public company must get shareholder approval before giving a financial benefit to its directors or other related parties unless the transaction is on arm’s length terms. Likewise, the responsible entity of a registered scheme must get member approval before giving a financial benefit out of scheme property to the responsible entity, its agents or other related parties, unless the transaction is on arm’s length terms. (In each case, there are other specific exceptions such as reasonable remuneration and indemnities).
ASIC considers that, in deciding whether the arm’s length exception applies, an entity must compare the terms on which the financial benefit is given to the objective range of possible terms that would reasonably be arrived at in the circumstances by parties that are unrelated, uninfluenced and self-interested.
ASIC also suggests that an entity consider the following, to the extent relevant to the particular transaction, when assessing whether the arm’s length exception is available:
(a) how do the terms of the proposed transaction compare to the terms that prevail in the open market for similar transactions between unrelated parties – for example, are there any terms that are unusually onerous for the entity;
(b) did the entity obtain expert advice;
(c) have alternative options been examined – if the terms of the proposed transaction are less favourable to the related party than the terms of the alternative options, the arm’s length exception is more likely to apply;
(d) what is the impact of the transaction on the entity’s financial position and performance;
(e) has the transaction been negotiated and structured in such a way that conflicts of interest are appropriately managed – for example is the agreement formally documented, were separate professional advisers used, did any director with a material personal interest participate in the transaction.
An entity should only rely on the exception if it is clear that the exception applies. If the application of the exception is merely arguable, then member approval should be obtained.
Information for members
If member approval to a related party transaction is required, the Corporations Act requires the entity to provide members with an explanatory statement that contains prescribed information about the transaction, including the nature of the financial benefit.
ASIC expects the entity to provide complete details of the financial benefit, including not only what the benefit is, but also the reason for giving the benefit and its value.
The value of the benefit will preferably be disclosed in dollar terms, especially where the benefit involves the issue of shares or other financial products, or the sale or purchase of an asset. An adequate valuation requires disclosure of the basis of the valuation, and the principal assumptions behind the valuation. An independent valuation may be required, especially where the directors have a conflict of interest.
The explanatory statement must also contain any other information that is reasonably required by members in order to decide whether or not it is in the interests of the company or the scheme’s members to pass the proposed resolution. If the related party transaction is part of a broader transaction, an explanation of each step of the broader transaction and its cumulative impact on the scheme should be disclosed. If reasonably required by members, the entity should include an explanation of why it concluded that the arm’s length exception did not apply.
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The material contained in this publication is no more than general comment. Readers should not act on the basis of the material without taking professional advice relating to their particular circumstances.
