Related or not related?

Identifying a related party transaction (RPT) is similar to playing detective and spotting the difference. If you’ve ever watched Suits (or the ongoing case of 1MDB), these transactions go from bank accounts to bank accounts, countries to countries and ending up settling in an offshore bank account. Tracing the chain of transactions is challenging at its simplest and are complicated to weave through the webs of thousands of transactions.

RPT is not always damaging to the companies as they might mutually benefit. For example, the principal company might award a contract to its subsidiary because of financial reasons and to save cost. However, RPT’s bad reputation and connotation stem from the fact that it is the most common way Directors and Trustees syphon out money from the company for personal benefit and money laundering.

  1. What is Related Party Transaction

As a basic and simple definition, a related-party transaction refers to any transaction involving the acquisition or disposal of interests in securities/assets by a company or any of its subsidiaries from or to a related party. The interest need not be financial or monetary interest. The Companies Act 2016 loosely defines “related” between corporation as:

Read that 3 times and see if you understand. Especially subsection (c ).

Interpretation:

  1. A and B are deemed related because A is the holding company of B (assuming full control). Nothing difficult.
  2. A and B are deemed related because A is the subsidiary of B. Nothing difficult.
  3. C and B are deemed related because C is the subsidiary of the holding company A of another corporation B.

(C ) is obviously the most contentious one because the question is then how far can you stretch this concept? Is C’s subsidiary’s subsidiary’s subsidiary deemed related to B? This would be the moot point of most RPT.

2. Who are related parties?

In addition to the above, transactions between the corporation and individuals/ other corporations which the directors of the company or substantial shareholder are connected to are considered a Related Party Transaction. Companies Act 2016 defines the how a person can be connected:

However, under section 221(3), a director shall NOT be deemed to be interested in any contract or proposed contract by reason only (a)relates to any loan to the company that the director has guaranteed or party to the loan; or (b) for the benefit of a corporation by virtue of section 7 is deemed to be related to the company that he is the director of that corporation.

As mentioned earlier, RPT are dangerous and are scrutinized because directors may enter into certain transactions at a grossly overvalued or undervalued price in which the director gets a personal benefit to the companies’ detriment. For example, Director A sells a piece of land to Individual B at 40% the market price who then sells it to Individual C at market price and splits the profit with Director A. This transaction, however, will be caught under the following provision:

This means that the transaction would be void unless shareholder approval is obtained at a general meeting or company approval at a Board meeting.

3. When and how is approval needed and obtained?

By default, RPT of any value requires a shareholders’ approval. At the general meeting,

  • An interested director in a RPT, must inform the Board of Directors of the Company the details of the nature and extent of his interest, including all matters in relation to the proposed transaction that he is aware or should reasonably be aware of, which is not in the best interest of the Company.
  • The director with interest, direct or indirect must abstain from deliberation and voting on the relevant resolution in respect of the RPT at the Board meeting. In a general meeting to obtain shareholders’ approval, a director or major shareholder, with any interest, direct or indirect, or person connected to them must not vote on the resolution approving the transaction.
  • Votes are to be taken on poll.

A similar provision to section 228 is encapsulated under section 223 Companies Act 2016. This deals with substantial transactions rather than RPT but I’m including this if RPT also happens to be a substantial value transaction which has additional requirements.

What approval procedures to follow would depend on the type of company involved in the transaction.

  1. Where a company’s shares are listed on the stock exchange

Under Chapter 10.08 of the Listing Requirements, “where any one of the percentage ratios of a related party transaction is 0.25% or more, a listed issuer must announce the related party transaction to the (Bursa Malaysia) as soon as possible after terms of the transaction have been agreed”. The valuation for the percentage ratio is calculated from the value of the assets compared to the net assets of the corporation so for example, the value of a piece of land a company intends to sell to the net asset of the corporation.

However, exceptions apply where the value is less than RM0.5mil or that it is a Recurrent Transaction.

If the percentage ratio is more than 5%, the corporation must announce the transaction to Bursa Malaysia + send a circular to shareholders + obtain approval at a general meeting + appoint an independent advisor before the transaction is agreed upon.

If the percentage ratio is more than 25%, the corporation must, in addition to the above requirements, also appoint a Principal Adviser who, inter alia, advise whether such transaction is carried out on fair and reasonable terms and conditions, ensure that such transaction complies with the relevant laws & regulations, ensure full disclosure and all the necessary approvals have been obtained, that it has discharged its responsibility with due care in regard to the transaction.

More regulations apply where it is a very substantial transaction (close to 100%) and where the company is a property developer with core business in development and real estate with development potential,

B. Where it is an unlisted subsidiary whose holding company is a listed company

Directors of the Holding company would obtain a shareholders’ approval in a general meeting in addition to shareholders’ approval of the unlisted subsidiary.

C. “Dan Lain-lain”

A substantial value undertaking or property or a substantial portion is when it either:

  1. Exceeds 25% of the value of the assets of the company
  2. The net assets attributed to it amounts to more than 25% of the total net profit
  3. The value exceeds 25% of the issued share capital

Whichever is highest

For this, approval procedure for substantial value transaction and RPT are the same– shareholders’ approval at a general meeting.

4. What is not a RPT?

Under the Chapter 10.08 of the Listing Requirements, the below are not normally regarded as RPT:

  • The payment of dividend, issue of securities by the Company by way of a bonus issue or for cash
  • An acquisition or disposal by the Company or its subsidiaries, from or to a third party, of an interest in another corporation, where the related party holds less than 10% in that other corporation other than via the Company;
  • The provision or receipt of financial assistance or services by a licensed institution upon normal commercial terms and in the ordinary course of business;
  • Directors’ fees and remuneration
  • the entry into or renewal of tenancy of properties of not more than 3 years, the terms of which are supported by an independent valuation

…. And more.

The case is less clear for “Dan Lain-Lain” but we can gain some inspiration from the Listing Requirements about what is expected.

Conclusion:

RPT particularly acute hence it is highly regulated and scrutinised to ensure the company has its’ checks and balances on its’ directors under the required rules and regulations. A breach of these regulations entails not only civil liability but also under criminal law where the director can be imprisoned and have a heavy fine upon them. Corporations must ensure that they are conducting business in an ethical, moral and legal manner hence the Companies Act 2016 places much more responsibility and liability on directors compared to Companies Act 1965.

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