Part 2E.1 sections 208 to 229 of the Corporations Act 2001 (Cth) (“the Act”) govern the rules in relation to “related party transactions” of public companies. Under the Act, in order for a financial benefit to be given by a public company to a related party, the public company must first seek the approval of its members.
For clarity, a ‘public company’ is a company that is listed on the Australian Stock Exchange (“ASX”). The rules surrounding related party transactions do not apply to proprietary companies.
What is a “related party”?
The Act provides a broad scope of who is considered a “related party” of a public company.
Related parties can include:
- Directors of the public company;
- Controlling entities and directors of controlling entities;
- Spouses of all above directors (including de facto spouses);
- Parents and children of the abovementioned people;
- Entities controlled by any of the above;
- Former-related parties (up to six (6) months prior);
- Future-related parties (reasonable belief test); and
- Someone acting “in concert with” a related party
What is a “financial benefit”?
Again, the Act broadly defines what is considered a “financial benefit” given to a related party.
It may include:
- Informal (verbal) agreements;
- Agreements with no binding force (for example, if a company says they’re going to give a gift to a director)
A financial benefit does not necessarily need to involve money. Instead, it may involve items of value, such as property, assets, supplying/receiving services, issuing shares, options, releasing obligations, and so forth.
Once members have given their approval to give the financial benefit to the related party, the benefit must be bestowed within fifteen (15) months of approval.
Are there any exceptions to these rules?
There are certain transactions which do not require shareholder/member approval prior to the related party receiving the financial benefit. These are found within sections 210 to 216 of the Act.
These exceptions include:
- “Arms length” transactions – if the related party can prove that the transaction is done on market terms and that they haven’t been given a special deal, it will be considered an ‘arms length’ transaction
- Small amounts (under $5,000.00); and
- Reasonable remuneration of officers and expenses of related parties
What penalties apply for breaching related party transactions legislation?
If any individual is found in breach of not complying with the law surrounding related party transactions, the company will not be liable and the transaction may still be considered valid.
An individual involved in the breach may be subject to civil penalties, or where the individual has been dishonest, criminal penalties.
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