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Additional obligations for related party transactions

Additional obligations for related party transactions

  • United Kingdom
  • Corporate

17-06-2019

The FCA has published its policy statement (PS19/13): Proposals to promote shareholder engagement: Feedback to CP 19/7 and final rules, to implement certain aspects of the Shareholder Rights Directive II (SRD II), which includes new rules on material related party transactions.

Background

SRD II amends the original Shareholder Rights Directive from 2007 and is concerned with effective stewardship and long term investment decision making for listed companies. SRD II had to be transposed into national law by 10 June 2019. The changes introduced by SRD II include transparency requirements for companies with shares admitted to trading on a regulated market in relation to related party transactions.

In the UK, companies with a premium listing are already subject to obligations under Listing Rule 11 (LR 11) with regards to related party transactions, including obtaining shareholder approval where any percentage ratio is 5% or more. However, the definition of a ‘related party’ required by SRD II (which is taken from International Financial Reporting Standards) is wider than the LR 11 definition (for a summary of the two definitions, see below).

In late January 2019, the FCA consulted on the proposed changes to its Handbook to implement the provisions of SRD II relating to related party transactions. The final rules published by the FCA broadly follow the consultation draft, but with some changes.

Who is a related party?

Broadly, the position under the two regimes is summarised below:

LR 11

  • Substantial shareholders (i.e. able to exercise 10% or more of the voting rights); or
  • A director or shadow director of the company, its subsidiary undertaking of its parent undertaking; or
  • A person exercisign significant influence; or
  • An associate (e.g. spouses, trustees and certain associated companies) of a related party referred to above 
  • SRD II

    Includes:

    (1)  Persons who:

    -       have control or joint control;

    -       have significant influence; or

    -       are members of the key management personnel of the company or its parent.

    (2)  Entities which:

    -       are members of the same group;

    -       are associates and joint venture parties;

     

    What is changing?

    - New category of related party transactions

    As proposed in the consultation, the FCA have left the current LR 11 regime for premium listed companies intact, but amendments to the Disclosure Guidance and Transparency Rules (DTR) sourcebook (DTR 7.3) will require companies with shares admitted to trading on a regulated market (including those with a standard listing) to disclose and seek board (but not shareholder) approval for material related party transactions falling within the wider definition required by SRD II.

    In terms of materiality, for the new category of SRD II related party transactions, the FCA had originally proposed a materiality threshold of 25% in any one of the profits, assets, market capitalisation and gross capital tests (which broadly mirror those set out in LR 11). However, following feedback to the consultation, the materiality threshold for this category of related party transactions will be 5% to align this with the threshold to the retained premium listing requirements.

    There are also rules on aggregation of transactions with the same related party over a 12 month period. The board approval and disclosure requirements apply to all transactions included in the aggregation and not just the one that results in the materiality threshold being reached. This will therefore be a challenge for companies that enter into a sequence of similar transactions with a related party, as they will need to plan for how they will be able to meet their obligations for such transactions under the aggregation rules.

    The effect of these changes is that premium listed companies will continue to comply with LR 11 in the usual way. Where a transaction is not caught by LR 11, but is caught by the new rules, premium listed companies will have to comply with the board approval and disclosure requirements in the DTRs. Companies with a standard listing that are not subject to LR 11 will have to comply with the new rules in the DTRs for all material related party transactions in scope.

    - Listed companies incorporated outside the UK or EEA

    The final rules for non-EEA incorporated companies have changed from those set out in the consultation draft. Listed companies that are not incorporated in an EEA Member State but which comply with a similar overseas regime will not be exempted from the requirements (as proposed in the consultation). Instead, such issuers will be subject to a modified regime. They will not be required to obtain board approval, but will be required to announce material related party transactions. They will also be able to use a definition of ‘related party’ either from IFRS or from alternative equivalent accounting standards that they use to prepare their annual accounts.

    Such issuers will need to consider whether they are required to disclose directors’ remuneration. Whilst this is exempted for Companies Act 2006 compliant companies, this exemption does not extend to companies not incorporated under the Companies Act 2006. This may be the case if the transaction is not in the ordinary course of business and concluded on normal market terms.

    What next?

    The final rules came into effect on 10 June 2019.

    Companies will need to comply with the new rules under DTR 7.3 from the start of the first financial year on or after 10 June 2019.

    The new rules do impose an increased regulatory burden for companies with a standard listing, and also potentially those with a premium listing where the transaction falls within the new regime but outside the premium listing requirements in LR 11.

    Useful links

    Policy statement (PS19/13): Proposals to promote shareholder engagement: Feedback to CP 19/7 and final rules

    Consultation on proposal to improve shareholder engagement CP19/7

     

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