SUGGESTIONS FOR REGULATING RELATED PARTY TRANSACTIONS IN THE SHAREHOLDERS RIGHTS DIRECTIVE

Transcription

1 SUGGESTIONS FOR REGULATING RELATED PARTY TRANSACTIONS IN THE SHAREHOLDERS RIGHTS DIRECTIVE The European Commission gave on 9 April 2014 a Proposal for a Directive of the European Parliament and of the Council amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement and Directive 2013/34/EU as regards certain elements of the corporate governance statement. The proposal includes new regulation on related party transactions. Regarding related party transactions the current proposal is not acceptable because of the disproportionate administrative burden caused by it on listed companies. SHRD proposal on related party transactions Article 9 c of the directive proposal sets onerous requirements for related party transactions. According to the proposal, transactions with related parties representing more than 5% of a listed company s assets would have to be submitted to a vote of the shareholders in a general meeting and could not be completed without shareholder approval. The same would apply to transactions which can have a significant impact on profits or turnover. Transactions with the same related party in a twelve month period which have not been approved by shareholders would be aggregated. Where the transaction involves a shareholder, this shareholder will have to be excluded from the vote. According to the proposal, listed companies must publicly disclose transactions with related parties that represent more than 1% of a listed company s assets at the time they are concluded and include a report from an independent third party that the transaction is fair and reasonable from the perspective of the shareholders, including minority shareholders (fairness opinion). Recurrent transactions of a clearly defined type with a particular related party can be approved by shareholders annually in advance. They will then be exempt from the above requirements. Member states may exclude transactions with wholly-owned subsidiaries from the application of the related party transaction rules. The administrative burden caused by the proposal The current proposal causes a disproportionate compliance burden on listed companies. Day-today business transactions cannot be subject to disclosures and fairness opinions or decided by the general meeting of shareholders. When monitoring the compliance of these requirements, companies would have to keep a list of all related parties and keep a record of all related party transactions group-wide, regardless of the size of the transaction.

2 Furthermore, the current text raises many questions. For example, the requirement of submitting significant transactions for shareholders approval is difficult to interpret and draw the line. Also, it seems that after the 5 % threshold has been met once, every single additional transaction requires a separate consent given by the shareholders, regardless how small and frequent these additional transactions are. The Commerce Committee of the Finnish Parliament has given a rather negative statement for the proposal (an unofficial translation): The Commission s proposal has to be restricted significantly. The current proposal endangers trade secrets and consumes the general meeting s time to the disadvantage of strategically more important decision-making. The schematic proposal does not take into account that conducted on market terms related party transactions are a fully normal part of business operations. The advance control of these transactions should be clearly restricted so that it covers only especially significant transactions that clearly differ from regular business operations, such as major company take-overs or real estate transactions. (TaVL 29/2014 vp - U 26/2014 vp) Even the Finnish Parliament is of the opinion that the proposal is not suitable for a basis of regulating related party transactions of a listed company. Current transparency requirements Directive 2006/46/EC has enhanced transparency of related party transactions requiring details of related party transactions to be disclosed in the notes to the annual accounts if such transactions are material and have not been concluded under normal market conditions. The information to be given is the amount of such transactions, the nature of the related party relationship and other information about the transactions necessary for an understanding of the financial position of the company. Through the annual accounts shareholders obtain relevant information on related party transactions. It can now be considered if transparency rules could be developed further to give investors appropriate information on the listed companies without causing disproportionate administrative burden.

3 Suggestions for adding transparency and safeguards without causing undue administrative burden In the following, an alternative model is offered in order to provide enhanced transparency and safeguards regarding related party transactions without causing disproportionate administrative burden on listed companies. Market or market equivalent term transactions to be exempted The current directive proposal would affect the procurement of raw materials, components and energy of some companies when the group structure is such that regular business is often conducted through intra-group transactions. The wording covers even transactions of moneymarket instruments such as bonds when the parties of the transaction happen to be related. It is clearly unnecessary and disproportionate to require shareholders approval for transactions where the outcome of the transaction would be essentially the same if conducted with an unrelated third party. All ordinary course of business should be excluded from the scope of the directive. All market or market equivalent or standard term transactions should be excluded from the scope of the directive. This means that such transactions with related parties would be exempted where the terms are the same or no more beneficial to the related party as the terms on which a comparable transaction would be carried out with an unrelated party. Ordinary course of business transactions should not be subject to disclosures, fairness opinions or decision of the general meeting of shareholders, regardless whether they are conducted with related or unrelated parties. Non-market-term intra-group transactions to be decided by independent directors The current proposal allows 100 % owned subsidiaries to be exempted from the requirements. This is not sufficient. Intra-group transactions should be exempted from the requirement of shareholders decision. Instead, if the transaction is not conducted on market-terms, it should be decided by independent directors who are not the third parties involved in the transaction. Thus an approval of the independent directors would be needed when a transaction with a related party would not be conducted on market or market equivalent or standard terms whereas all market-term etc. transactions should be excluded from the scope of the directive as suggested above. Reversed burden of proof Reversed burden of proof could be used as a safeguard against abuse regarding directors liability for damages caused by related party transactions decided by the board (or independent directors

4 as suggested above). The Finnish Companies Act stipulates reversed burden of proof for related party transactions. The role of Corporate Governance Code and Corporate Governance Statements A solution to add transparency and trust would be to set a rule obliging the national corporate governance codes to require listed companies to describe the main features of their group structure and business model in their annual corporate governance statement if related party transactions are a part of the business model for example in the procurement of raw materials, components or energy. Currently the duty of listed companies to issue an annual corporate governance statement is based on Directive 2006/43/EC adding Article 46a to Directive 78/660/EEC on the annual accounts. According to the article the auditor of the company shall check that the corporate governance statement has been produced. Also, corporate governance codes could inform investors of the national legal framework regarding related party transactions, especially the safeguards against inappropriate actions. The role of audit In Finland, the law requires audit to be more extensive than in the other EU countries. Audit in Finland covers not only the financial statements of the company but also the administration of the company. This means that significant related party transactions are routinely reviewed by auditors in Finland thus making shareholders approval unnecessary also for this reason. Perhaps the role of auditors could be considered to include the review of significant related party transactions also in the other Member States.

5 Conclusion A suitable model for combating abusive related party transactions without causing undue administrative burden regarding normal course of business would be to add transparency and other safeguards as follows. A listed company would be required to describe its groups structure and business model in its annual corporate governance statement if related party transactions are a part of its business model for example in the procurement of raw materials, components or energy. Market or market-equivalent or standard term transactions with related parties would not require disclosures, fairness opinions or shareholders decisions when conducted within the frame of the business model described in the corporate governance statement. The auditor of the company has a duty to check that annual corporate governance statements are given. This model would enhance transparency of such business models where companies procure raw materials, components or energy from related parties. When these transactions are conducted on market or market equivalent or standard terms, the requirement of disclosures, fairness opinions and shareholders approvals would be clearly excessive. Non-market-term intra-group transactions could be required to be decided by independent directors. A safeguard against abuse would be reversed burden of proof if the decision causes damages to the company while directors are liable for damaged caused by their actions to the company.