I had a meeting with a client last week that highlighted to me the importance of understanding your obligations when dealing with related parties of your company. This client was experiencing some significant financial difficulty and thought that the assets the client wished to protect from the company at risk of going into liquidation, were in fact protected.
We discovered a number of related party transactions that were never properly recorded, legally or from an accounting perspective, which could have jeopardised millions of dollars in assets.
ASIC have recently issued a regulation providing guidance for entities on ASIC’s expectations and requirements in relation to various aspects of “related-party transactions” under the Corporations Act.
The revised guide increases the standard of disclosure for related-party transactions and general disclosure documents.
Under the Corporations Act, a company must obtain shareholder approval to give a financial benefit to a related party. An exception to this is when the transaction is on terms that would be reasonable in the circumstances, if the company and related party were dealing at arm’s length, or on terms that were less favourable to the related party.
ASIC has included a checklist of factors that companies need to consider when determining whether the “arms length” exception applies. At a minimum, 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 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 entity (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 entity and why they did not or could not proceed; and
- any expert advice received by the entity on the transaction.
It is very important to get experienced legal and accounting advice to ensure these transactions are not at risk of being clawed back, at some point in the future, or realising unexpected tax consequences.
Please contact me to discuss any questions you may have for related party transactions in your business.