Statutory disclosure obligations; related party transactions

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This topic is within Business Associations.

Contents

Required Reading

Redmond, Paul Corporations and Financial Markets Law 6th ed, 2013, LBC, pp. [7.415]-[7.450] ; [7.545]-[7.560].

Introduction

As discussed under the directors’ duty to avoid conflict, directors have a statutory obligation to disclose any material personal interests they have in relevant matters to other directors. The key provisions of the Act are extracted here:

  • S 191 – the main provision for duty to disclose:
    • (1) imposes the duty
    • (2) specifies exceptions to the duty
    • (3) specifies that the notice must give details of the nature and extent of the interest and the relation of the interest to the affairs of the company.
  • S 192 – standing notices (a notice of a general conflict which releases the director from having to disclose an every time a potential conflict arises).
    • (1) provides for standing notices
    • (2) notice may be given orally/in writing during meeting and in writing to each director if not in meeting.
    • (3) & (4) notice must be recorded or tabled at a meeting.
    • (5) notice ceases to apply once any new director comes in
    • (6) notice ceases to have effect if nature or extent of the interest materially increases above that disclosed in notice
    • (7) Contravention of this section does not invalidate a resolution.
  • S 193 – statutory disclosure obligations operate in addition (and not in derogation) of general law duties and any constitutional rules.
  • S 194 (also a replaceable rule) – if a director discloses their duty or comes within the exceptions of 191 (2):
    • Able to vote on matters that relate to the interest
    • Any transactions that relate to interest may proceed
    • The director may retain benefits under transaction; and
    • The company cannot avoid transaction merely because of existence of interest
  • S 195 – public companies:
    • director of a public company with personal interest must not be present while matter is being considered at meeting/vote on matter.
    • Exclusion does not apply if interest is exempted from disclosure or if directors who do not have material personal interest in matter pass a resolution that:
      1. Identifies the directors, the nature and extent of the directors’ interest in matter and its relation to affairs of company; and
      2. States that those directors are satisfied the interest should not disqualify the other directors from voting or being present: s 192(2)
    • The director may also participate with ASIC approval where matter could not otherwise be dealt with for want of quorum and because of this urgency or other compelling reason cannot be dealt with by the general meeting - if a director with a material personal interest also possesses confidential info relevant to a matter before board disclosure, and non-participation may not be sufficient in circumstance to discharge duty: Wheeler
    • The director may consider or vote on resolution to deal with matter at GM: if not enough directors to form a quorum for the directors meeting due to (1), 1+ of Ds (including those who have material personal interest in the matter) may call a GM and GM may pass resolution to deal with matter
    • Contravention does not affect validity of resolution
  • Schedule 3: breach of either s 191 or 195 attracts criminal penalties.

Restrictions in indemnities

Directors can be released from liability in a number of situations:

  • By a resolution of the general meeting ratifying their breach of duty
  • Board may be empowered to release one of its number from a duty or consequence of its breach: Queensland Mines.
  • Court can grant relief in particular circumstances: s 1318
  • In company constitutions indemnifying them against liability arising out of their office.

In 1928, companies legislation in Britain begun to regulate the circumstances in which companies may release officers from the liabilities of office or pay premiums upon insurance policies in respect of their performance as director

  • To combat that, Part 2D.2 Div 1 states that officers may not be exempted at all by their company for liability incurred as officer or auditor - however indemnification and payment of insurance premiums is permitted in circumstances other than those expressly prohibited.
  • In other words, there are now restrictions on indemnities and insurance for directors and officers.

Exemption from liability as an officer: s 199A(1)

Exemption from liability is not allowed, though it is clear from the cases on directors’ interests in company contracts and secret profits that the duties imposed by equity upon directors may be relaxed through a companies’ constitution without offending s 199A.

Indemnification against liability as an officer: s 199A(2)

Except in relation to liability for legal costs, a company must not indemnify a person against three species of liability incurred as an officer of the company: s 199A(1)(a), (b), (c).

  • An indemnity may be given against liability for legal costs which is contingently expressed so as not to cover the outcomes referred to in s 199A(3)(a) or (b).

Directors insurance: s 199B

Presents somewhat as a moral hazard in that such protection may remove or at least reduce incentive to comply with legislation

  • Others think that the longer term effect is to enhance discipline by creating litigation incentive to observe duties and for insurer incentive to impose own discipline policies (statutory exclusions do not apply to such policies) upon directors by restricting cover or making it conditional
  • Whatever the governance effects, there is a market for directors insurance, even despite it not being compulsory form of insurance as with some professions
  • Directors insurance covers against liability for ‘wrongful acts’ committed in the course of the office, which include breaches of duty, neglect, misstatement, omission or other act of insured or liability arising from the performance of office
  • Directors can also take out personal insurance cover at own expense to cover liabilities, including for legal costs, beyond company policies - statutory exclusions do not apply to such policies

Related party transactions

The Corporations Act Chapter 2E regulates public companies’ transactions with ‘related’ parties. Note that this applies only to public companies. Broadly, the Act requires member approval for giving financial benefits to related parties that could endanger those interests: s 207. These requirements are prescriptive and may not be overridden by provisions in companies constitution.

  • s 208 Need for member approval - a public company (or a company controlled by a public company) can only give a benefit to a related company if either:
    • (a) the public company
      • (i) obtains the approval of the public company's members in the way set out in sections 217 to 227; and
      • (ii) give the benefit within 15 months after the approval; or
    • (b) the giving of the benefit must fall within an exception set out in sections 210 to 216.
  • Note: a company “controls” an entity if it has the capacity to determine the outcome of decisions about the entity’s financial and operating policies: s 50AA (1) (see section).
  • s 209 Consequences of breach:
    • (1) (a) contravention does not affect the validity of any contract or transaction connected with the giving of the benefit; and
    • (1) (b) the public company or entity is not guilty of an offence.
    • Note: A Court may order an injunction to stop the company or entity giving the benefit to the related party (s 1324).
    • (2) However, civil penalty provision against people 'involved' with the contravention (s 79 defines 'involved')
    • (3) persons involved in the contravention who were also dishonest are guilty of an offence.
  • s 230: general law duties still apply.

Exceptions

ss 210 – 216: Exemptions to the requirement for member approval:

  • s 210: at arm’s length transactions, or those less favourable to the related party than arm’s length transactions
  • s 211: the benefit is a reasonable remuneration of an officer or employee of the company, a controlled entity, a controlling entity, a controlled entity of a controlling entity or payments of expenses incurred.
  • s 212: for indemnities, exemptions or insurance premiums; for legal costs in defending officer’s liability;
  • s 213: amounts not exceeding $2000 to a director or spouse;
  • s 214: benefit given to or by a closely-held subsidiary;
  • ss s 215, s 216: benefits which do not discriminate amongst members or those given under an order of the court.

Procedure to obtaining approval

Ss 217 – 227: Procedure for obtaining member/shareholder approval:

  • s 217: approval may be given by reference to class/kind of benefit - resolution of public company approving financial benefit to related party is effective only if conditions re disclosure and voting are satisfied.
  • s 219 (1) (a), (b): conditions require public co to prepare an explanatory statement setting out related parties to whom proposed resolution would permit benefit to be given and nature of benefits.
  • s 219(1) (c), (d): statement must set out recommendation each director of co makes about proposed resolution and their reason for it, if director does not wish to make recommendation, or was not available, reason for that decision/unavailability must be disclosed.
  • s 219(1) (e) statement must also contain all such info known to the company/any of its directors that is reasonable required by members in order to decide whether/not it is in company’s interests to pass proposed resolutions.
  • s 219 (2) such disclosure might include info about what, from economic and commercial point of view, are the potential costs of the proposed benefits, including opportunity costs, taxation consequences and benefits forgone by entity giving benefits.
  • s 218 (1): at least 14 days before the notice convening meeting is given to members, co must lodge with ASIC:
    • Proposed notice of meeting
    • Proposed explanatory statement
    • Any other doc proposed to accompany notice convening meeting; and
    • Any other doc which can reasonably be expected to be material to member in deciding how to vote on proposed resolution that co, related party to whom benefit is to be given and associates of either proposes to give to members before/at meeting.
  • s 220 (1): within 14 days after a public co lodges these docs, ASIC may give co written comments on those docs, other than comments about whether proposed resolution is in company’s best interests.
  • s 221 Where ASIC has given comments to public co, they must accompany notice convening meeting given to members. Notice must be in same in all material respects as proposed notice lodged with ASIC and must be accompanied by explanatory statement and other docs lodged with ASIC, and by no other material.
  • s 223 resolutions approving giving of benefit must be same as that earlier proposed in notice of meeting lodged with ASIC.
  • s 224 (1) at the GM, vote on proposed resolution must not be cast by/on behalf of related party who would benefit under resolution/an associate of such related party. If any votes on resolution are cast in contravention of this, resolution will be valid ONLY IF it would still be passed even if those votes were disregarded (s 225(1)); otherwise, contravention of voting restriction does NOT affect validity of resolution (s 224(8)).
  • s 225 (3) – (5) votes cast by each member voting, in person or by proxy, must be recorded in writing showing member’s name and how many votes each cast for resolution and how many against.
  • s 226 within 14 days after resolution passed, public co must lodge with ASIC notice setting out text of resolution.
  • s 227 (1) court may declare conditions prescribed here have been satisfied if it finds they have been substantially satisfied.

Definition of 'related party'

s 228: Related parties are:

  1. Controlling entities (holding company)
  2. Ds of co/controlling entity (holding company) and their spouses
  3. Relatives of directors and spouses of company/controlling entity (parents and children)
  4. Entities controlled by other related parties (ie, majority shareholders)
  5. Related party in previous 6 months (seeks to inhibit, for example, avoidance devices such as temporary resignation/divestiture with view to avoiding prohibition)
  6. Entity has reasonable grounds to believe it will become related party in future (catching giving such benefits in anticipation of related party relationship with public company
  7. Acting in concert with related party (on understanding related party will receive financial benefit if public co gives entity a financial benefit)
    • List is not exhaustive and does not include for example;
    • Subsidiary/other controlled entity of public company;
    • Subsidiary’s directors/those of fellow subsidiary of public co unless they are also directors of parent entity/otherwise a related party;
    • Siblings/other relatives of these directors/directors spouse, apart from parent/child

Definition of 'giving a financial benefit'

s 229: Giving a financial benefit means:

  1. Where benefit conferred: in determining whether such benefit is given
    • (a) Broad interpretation – even if criminal/civil penalties may be involved; AND
    • (b) Economic and commercial substance of conduct is to prevail over legal form; AND
    • (c) Disregard any consideration that is/may be given for benefit even if consideration is adequate.
  2. Giving a financial benefit defined: includes
    • (a) Giving financial benefit indirectly (i.e. through 1+ interposed entities)
    • (b) Giving it by making an informal agreement, oral agreement/agreement with no binding force;
    • (c) Giving financial benefit that does not involve paying $ (i.e. by conferring a financial advantage.
  3. Examples of giving a financial benefit to a related party:
    • Giving/providing related party property/finance;
    • (b) Buying asset from/selling asset to related party;
    • (c) Leasing an asset from/to related party;
    • (d) Supplying services to/receiving services from related party;
    • (e) Issuing securities/granting an option to related party;
    • (f) Taking up/releasing an obligation of the related party

Application in Adler v ASIC

ASIC claimed HIHC’s payment to PEE involved a contravention of s 208 on the basis that PEE was a related party of HIHC. Court held that Adler knew all the facts which made the payment to PEE the giving of financial benefit otherwise than on arm’s length terms even if he mistakenly assumed that the transaction was protected by s 210.

End

This is the end of this topic. Click here to go back to the main subject page for Business Associations.

References

Textbook refers to Redmond, Paul Corporations and Financial Markets Law 6th ed, 2013, LBC.

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