ASIC guidance on related party transactions - arms length exception is no quick fix

On 30 March 2001 ASIC released its updated policy on the related party transactions rules. Among a number of other changes (including relating to expert reports, and disclosures required in member meetings),

ASIC has given its views on when the "arm's length" exception may apply to the requirement for shareholder approval to be obtained for a related party transaction.

The Corporations Act states that a public company (or a registered scheme) must obtain shareholder approval to give a financial benefit to a related party, unless an exception applies. For these purposes a "related party" includes an entity that controls the public company (and if the controller is not a company, each of the persons making up the controller), the directors of the public company, the directors of an entity that controls the public company and the spouses of each of these people.

The major exception to the shareholder approval requirement is the "arm's length" exception. This provides that shareholder approval is not needed to give a financial benefit on terms that would be reasonable in the circumstances if the public company (or registered scheme) and related party were dealing at arm's length or are less favourable to the related party than these terms.

The Corporations Act does not define what "arm's length" means. However, ASIC has provided some guidance on what factors companies should take into account when deciding whether to seek member approval or whether the arm’s length exception applies. ASIC considers each of the following are relevant factors:

• 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 entity 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 (for example the impact on the financial position and performance of the company) and non-associated members
  any other options that may be available to the company expert advice received by the company on the transaction (if any).

Importantly ASIC considers that directors should only rely on the arm's length exception when they are persuaded that the exception does apply, rather than it being merely arguable that it applies and as such if after taking into account the above factors and any other relevant factors, it is not clear that the transaction falls within the arm’s length exception, ASIC considers that shareholder approval should be sought.

The conclusion of the policy document in our opinion doesn't really change the law. It does, however, clarify that the arm's length exception isn't the means to an "easy fix" for directors in blessing a transaction that may otherwise require shareholder approval.
Partner: Gerry Cawson