Publications / Corporate Advisory
On 30 March 2011, the Australian Securities and Investment Commission (ASIC), released updated versions of a number of regulatory guides relating to party transactions and expert reports. The changes raise the standard of disclosure and governance for public companies and responsible entities of managed investment schemes that are involved in related party transactions.
The regulatory guides updated were:
- Regulatory Guide 76: Related Party Transactions (RG 76)
- Regulatory Guide 111: Content of expert reports (RG 111), and
- Regulatory Guide 112: Independence of experts (RG 112).
In particular, the updated regulatory guides now include:
- a list of factors directors must consider when determining whether the arm’s length exception in section 210 of the Corporations Act 2001 (Cth) (Corporations Act) applies
- guidance on when ASIC considers an independent expert report should be included in a notice of meeting to consider a related party transaction and a specific requirement that the expert should meet the test for independence under RG 112
- specific guidance for experts on preparing reports for related party transactions
- a requirement to disclose all related party transactions in prospectuses, product disclosure statements and other disclosure documents, except for ‘inconsequential’ transactions or transactions that have previously been adequately disclosed, and
- requirements for the inclusion of further specific information in notices of meeting to consider a related party transaction.
Arm’s length exception
Under Chapter 2E of the Corporations Act, a company must obtain shareholder approval to give a financial benefit to a related party, unless a relevant exception applies. A major exception to the requirement to obtain shareholder approval is where the transaction with a related party is on terms that would be reasonable if the parties were dealing at ‘arm’s length’.
Having recently conducted a review of related party transactions, ASIC has observed that the arm’s length exception was not applied by companies consistently and that, in many cases, the exception was being applied without a proper analysis of whether the terms of the transaction could reasonably be considered arm’s length terms.
In particular, ASIC has indicated that the collapse of Babcock & Brown, Allco, Great Southern and ABC Learning demonstrated that greater scrutiny of related party transactions was required. 
To address this, ASIC has updated RG 76 to include a comprehensive checklist of factors that entities need to consider when determining whether the arm’s length exception applies. In summary, these are:
- how the terms of the overall transaction compare with those of any comparable transactions between parties dealing on an arm’s length basis in similar circumstances
- the nature and content of the bargaining process, including whether the company followed robust protocols to ensure that conflicts of interest were appropriately managed in negotiating and structuring the transaction
- the impact of the transaction on the company (e.g. the impact of dealing on those terms on the financial position and performance of the company) and non-associated members
- any other options available to the company, and
- any expert advice received by the company on the transaction.
All of the relevant factors should be taken into account. If any doubt exists after all of the factors have been considered, ASIC indicates that the company should seek member approval for the transaction.
Independent expert reports
The Corporations Act does not currently require a company to obtain an independent expert report where the company is seeking shareholder approval for a related party transaction.
ASIC has also updated RG 76 to provide guidance on when it may be necessary for companies to include an independent expert report with a notice of meeting for member approval under the Corporations Act.
These circumstances include where:
- the transaction is significant from the point of view of the company
- the financial benefit is difficult to value
- the non-interested directors do not have the expertise or resources to provide independent advice to members about the value of the financial benefit, or
- the related party transaction is a component of a control transaction for which the company is commissioning an expert report (e.g. for member approval under item 7 of section 611 Corporations Act).
How experts should assess related party transactions
The amendments to RG 111 provide further guidance about how an expert should assess a related party transaction when preparing a report. The guidance covers:
- the importance of an expert focussing on the substance of the related party transaction, rather than the legal mechanism
- the need for the expert to make an separate assessment of whether the transaction is ‘fair’ and whether it is ‘reasonable’
- the meaning of the words ‘fair’ and ‘reasonable’ in the context of a related party transaction.
ASIC has also clarified in RG 112 that experts who prepare reports on related party transactions under Chapter 2E of the Corporations Act should meet the standards of independence set out in RG 112.
Disclosure about related party transactions
ASIC has previously indicated its view that information about related party arrangements is information that investors reasonably require in order to make informed decisions about whether to acquire a security or managed investment product.
As a result, ASIC has updated its guidance in RG 76 on the content requirements for prospectuses, product disclosure statements, and other disclosure documents.
The updated guidance provides that disclosure documents should describe:
- all related party arrangements (other than those that are ‘inconsequential’ or for which investors already have adequate information) including the value of the financial benefit if it can be quantified
- the nature of the relationship
- whether the arrangement is on arm’s length terms or some other Chapter 2E exception applies
- whether member approval for the transaction was sought and, if so, when, and
- the policies and procedures that the company or registered scheme has in place in relation to entering into related party transactions, and how compliance with these policies and procedures is monitored.
The guidance does not indicate when ASIC will consider a transaction to be ‘inconsequential’.
Notices of meeting
The Corporations Act currently outlines the content requirements for notices of meeting and explanatory statements seeking member approval of related party financial benefits. Sufficient information must be given to members to enable them to decide whether or not the financial benefit to be given to a related party is in the interests of the company.
The updated RG 76 provides further guidance on what should be included in such notices of meeting and explanatory statements.
In particular, RG 76 now provides guidance on disclosure about:
- director recommendations
- alternative options to the related party transaction and the reasons for choosing the related party transaction
- the impact of the transaction on the entity, and
- valuation of the financial benefit and, where relevant, the expert report.
Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.
 Source: Australian Financial Review – 31 March 2011