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27 Aug 2010

Related party transactions at the AGM

Annual general meetings are a convenient time to get shareholder approval for related party transactions (such as the issue of securities to directors).

For that reason, ASIC has used the upcoming AGM season to renew its warnings about the information provided to shareholders before such a vote.

In a recent statement, the Commission reminded companies of what it looks for when examining explanatory materials for a related party benefit vote.

Background

Related party benefits must generally be approved by shareholders of public companies unless they constitute reasonable remuneration or are on arm's-length terms. There is no bright line test for what constitute reasonable remuneration or arm's-length terms. As a result, many companies opt for the "whitewash" option of shareholder approval.

An essential component of that whitewash procedure is giving shareholders an explanatory statement about the proposed benefit. The explanatory statement must be lodged beforehand with ASIC. If the Commission has adverse comments about the adequacy of the explanatory statement, the company must send those comments to the shareholders.

What does ASIC look for?

In its statement, ASIC drew particular attention to a number of what it has described as "common defects" in related party explanatory statements:

Inadequate valuation of the financial benefit - whether securities or assets - is a recurring theme. In ASIC's view, an adequate valuation requires disclosure of the basis of the valuation and the principal assumptions behind the valuation. In some circumstances it may also be necessary to provide a valuation by an independent expert. If the company is purchasing an asset from a related party in exchange for shares, it may be necessary to include valuations of both the asset and the shares.

The related party who is to receive the financial benefit should be clearly identified.

The details of the financial benefit should include not only the type and amount of the benefit, but also the reason for giving the benefit and the basis for giving the particular benefit.

Shareholders should be told of any interest that the related party already has in the company. This would allow them to determine the likely extent of the related party's influence or control if the financial benefit were to be granted.

Shareholders should also be told if the benefit may have "dilution effects" on them. If there is a possible dilution effect, it should be set out or shareholders should be given sufficient information to allow them to calculate the effect themselves.

If the financial benefit is equity related, shareholders should be provided with the trading history of the relevant equity for the preceding 12 months. This information should include:

  • the lowest and highest prices the equity traded at during those 12 months; and
  • the most recent closing price.

ASIC has expressed concern about inadequate compliance with the Corporations Act requirement for 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.

Another ASIC concern is that the recipient's total remuneration package should be disclosed where the proposed benefit is to be given by remuneration or an incentive.

Given its central role in the process, ASIC's list of concerns is essential reading for any company contemplating shareholder approval for a related party benefit.

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Disclaimer

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.