DEFINING, DISCLOSING AND DISCOURAGING RELATED PARTY TRANSACTIONS (RPT)

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DEFINING, DISCLOSING AND DISCOURAGING RELATED
PARTY TRANSACTIONS (RPT)

• Presented by John K M Lim
• Council Member and Hon. Secretary
• Singapore Institute of Directors
• Based on a paper prepared by
• Dr Mak Yuen Teen, Associate Professor
• NUS Business School, National University of
  Singapore
• The Fourth Asia Roundtable on Corporate
  Governance
• Mumbai, India
• 11 13 November 2002

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AGENDA

• Definitions of Related Party Transactions (RPT)
• Importance of managing RPT
• Legal and regulatory framework
• International Practices
• - USA
• - UK
• - Australia
• - Hong Kong
• - Singapore
• Conclusion

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Related Party Transactions (RPT)

• RPT a transfer of resources or obligations
  between related parties
• Related Parties (RP) subjected to common
  control or common significant influence
• May expose a reporting entity to risks or
  provide opportunities
• Tendency not to be effected on same terms
  conditions as between unrelated parties
• May not be given accounting recognition
• Have a material effect on the operating results
  financial position of an enterprise

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Related Party Transactions (RPT)

• RP and RPT not always easily identifiable
• Potential for distorted or misleading financial
  statements in the absence of adequate disclosure
• Instances of fraudulent financial reporting and
  misappropriation of assets facilitated by RPT
• Undisclosed RP a powerful tool in the hands of
  unscrupulous person
• Identification, disclosure and approval form
  basis of regulatory framework

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Legal Regulatory Framework

• Various terminology and definitions are used to
  describe RPT RP in different countries
• Common law jurisdictions framework
• 1) Requires information to be filed with a
  central registry maintained by governmental
  authorities
• 2) Required to maintain up-to-date registers
• 3) Listed companies required to disclose
  information of their top management team,
  substantial shareholders to the Exchange
• 4) Required to disclose identity of RP in annual
  reports

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Legal Regulatory Framework

• Disclosure of RPT is make up of 3 requirements
• 1) Under the common law
• - Primarily concern directors, no common law
  rule for other RP (ie.key managers, substantial
  shareholders)
• - Director-related transactions require
  shareholder approval
• 2) Under corporate legislation
• - Usually more specific than (1) carry
  criminal or penal sanctions
• - Requires companies to furnish shareholders
  with annual report audited accounts
• 3) Quasi-legislative requirements
• - Eg stock-exchange listing requirements
• - Focus relevant, accurate timely
  disclosure of RPT

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International Practices USA FASB Statement No.
57

• Must include disclosures of material RPT
• The disclosures must include
• - The nature of the relationships involved
• - A description of the transactions
• - The dollar amounts of the transactions any
  changes
• - Amounts due from or to RP the terms of
  settlement
• Disclosure of RPT that are eliminated in the
  preparation of consolidation financial statements
  is not required

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International Practices USA SEC Release No.
34-45321

• Should include a description of all elements of
  RPT necessary for an understanding of its
  business purpose
• - The identity of RP
• - How the transaction price was determined
• - How any evaluation of fairness was made
  whether there are any ongoing commitments as a
  result of RPT
• The effect on the companys financial statements
  and special risks or contingencies arising from
  RPT

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International Practices USA NYSE Listed
Company Manual Section 307.00

• Disclosure of RPT required in the companys
  annual report, proxy statements SEC fillings
• RPT is to be reviewed evaluated by the Audit
  Committee or another comparable body
• Some RPT require shareholder approval
• - NYSE Listing Company manual Section 312.00
• Shareholder Approval Policy should be
  considered
• - Exemptions - Any public offering for cash
• - Any bona fide private financing

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International Practices UK FRS 8 Related Party
Transactions

• Disclose the existence of RP the nature and
  extent of any transactions with them
• Requires 2 parts of disclosure
• 1) Disclosure of control
• 2) Disclosure of transactions
• Exemptions Transactions with
• - Group entities that are eliminated on
  consolidation
• - Providers of finance in the normal course of
  business
• - Utility companies, suppliers, customers (for
  huge volume of business)
• - Government bodies

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International Practices UK UK Listing
Authoritys Listing Rules, Chapter 11

• When entering into a RPT, the company must
• - Make an announcement stating all
  elements of the RPT
• - Furnish its shareholders with a circular
• - Obtain shareholders approval
• Exemptions include
• - Companies without listed securities
• - Overseas companies with a secondary listing
• - Transactions in the normal course of business
• - Joint investment arrangement on normal terms
• - Small transactions

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International Practices Australia Corporations
Law, Chapter 2E

• Section 208 states
• - Shareholders approval is required except for
  those exempted under Section 210-216
• - RPT must take place within 15 months after
  approval
• Exemptions under Section 210-216 include
• - Transactions in the normal course of business
• - Renumeration reimbursement for employee
• - Indemnities, insurance premiums legal costs
• -Transactions of small amounts (less than
  2,000)
• - Benefit to or by closely-held subsidiaries

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International Practices Australia AASB 1017
Related Party Disclosure

• Prescribe disclosure of all RPT where control or
  significant influence exist
• Disclosure requirements for transactions within
  the wholly owned group are less detailed than
  others
• Required to disclose items eliminated on
  consolidation
• Disclosure on an individual basis is required
  when the sum of the RPT is significant
• Exemptions transactions in the normal course
  of business

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International Practices Australia AASB 1017
Related Party Disclosure

• Transactions covered by this chapter include
• - Acquiring disposing of substantial assets to
  RP
• - Issue of securities to RP
• Shareholder approval must be obtained
• A report from an independent expert is needed
• The following transactions are exempted
• - Between the entity a wholly owned subsidiary
• - Between wholly owned subsidiaries of the
  entity
• - Issue of securities under an underwriting
  agreement under an employee incentive scheme
  on the conversion of convertible securities
• - Value of securities issued do not exceed 3,000

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International Practices Hong Kong HKSA
Statement 2.120

• Should disclose the nature of all RPT including
  
• - Types elements of RPT
• - Volume of the transactions
• - Amounts of outstanding items
• - Pricing policy
• Transactions of a similar nature may be
  disclosed in aggregate
• Exemptions include
• - Transactions eliminated on consolidation

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International Practices Hong Kong HKSE Listing
Rules, Chapter 14

• Rules 14.23 14.32 require companies
• - To disclose details of Connected
  Transactions
• - To obtain shareholders approval for material
  transactions
• 3 categories of Connected Transactions
• 1) Rule 14.24 Not subjected to disclosure
  shareholders approval
• 2) Rule 14.25 Subjected only to disclosure
  requirements
• 3) Rule 14.26 Subjected to both disclosure
  shareholders approval
• Active consultation with HKSE

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International Practices Singapore SAS 21

• All RP relationship involving control should be
  disclosed regardless of whether RPT occurs
• Requires disclosure of
• - The nature, types elements of RPT
• Transactions with the following are exempted
• - Common directorships
• - Provider of finance Trade union
• - Public utilities government department
  agencies
• - A single customer, supplier (transacting huge
  volume of business)

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International Practices Singapore SGX Listing
Manual, Chapter 9

• RPT ? 3 of issuers latest audited NTA require
  immediate disclosure through announcement
• RPT ? 5 of issuers NTA require shareholders
  approval
• - Opinion of Independent Financial Adviser (IFA)
  required on whether RPT is
• (i) on normal commercial terms
• (ii) prejudicial to the interests of the issuer
  and its minority shareholders
• - Opinion of Audit Committee required if
  different from that of IFA
• Announcement required for RPT local property
  irrespective of value
• - Review by and approval of audit committee
  required
• - Shareholder approval required for RPT ? 5 of
  issuers NTA

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International Practices Singapore SGX Listing
Manual, Chapter 9

• Exceptions
• - Transactions below 100,000
• - Dividends, bonus issue, approved options
• - Directors fees, employee remuneration
• - Provision of goods, services on normal
  commercial terms, normal course of business
• - Awards by public tender
• - not a substantial shareholder

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International Practices Singapore Take-over Code

• Take-over offers by RP
• MBO
• Safeguards
• - Offeree required to obtain independent advice
• - Equality of information

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Concluding Remarks

• Not all RPT are necessarily disadvantageous to
  issuer
• Accounting standards tend to focus on
  identification and measurement of RPT not
  disclosure
• Over reliance on management and principal owners
  to identify RP and RPT
• Proactive role of Audit Committee, Board and
  major shareholder
• Check and balance
• Strong regulatory framework, active watchdogs
  and effective enforcement are key success factors
• Rule based procedures no substitute for honesty
  and integrity

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• Thank you

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