Related party transactions (RPT) should be under the microscope of all regulators after a recent series of controversial RPTs.

 

More often than not, such deals attract controversy because parties to RPTs are inherently in a special relationship. We all know that special relationships can create conflicts of interest that generally benefit only those in the relationship.

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Given the risk of such complicity, Bursa Malaysia's listing rules require RPTs to be in the best interests of a public limited company (PLC) and must not be detrimental to minority shareholders. The rule in question requires Bursa to monitor any transaction that presents a risk of potential abuse. One of their tasks includes engaging with the PLCs based on their announcements or circulars, and based on complaints received. Those who flout this rule, be it companies or their directors, face a public reprimand or a fine, or both.

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Reviewing Paragraph 10.02 (c) of Bursa's Listing Requirements, there is under the heading Transactions, the definition of a “director”. Besides having the meaning given in Section 2(1) of the Capital Markets and Services Act 2007, the definition includes any person who is or was within the preceding six months of the date on which the terms of the RPT were agreed upon:

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A director of the listed issuer, the subsidiary or holding company; or

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A chief executive of the listed issuer, its subsidiary or holding company; and

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In relation to Special Purpose Acquisition Companies (SPAC), a member of the SPAC's management team.

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Taking this definition one step further, and referring to Paragraph 10.08, under the heading RPT and Paragraph 10.08(9), it is stated plainly that “where any one of the percentage ratios of a RPT entered into between a subsidiary of a listed issuer and another person, is 5% or more and there are no other interested relationships except for a related party having an interest in the transaction who is:

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A director or major shareholder of such subsidiary or the holding company of such subsidiary (other than the listed issuer or a holding company of the listed issuer) (“said director” or “said major shareholder”); or

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A person connected with the said director or said major shareholder.

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The rules then exempt a listed issuer from:

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Issuing a circular to shareholders;

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Obtaining shareholders' approval of the transaction during a company general meeting; and

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Appointing a main adviser or independent adviser, as the case may be.

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The rules also require the board of directors of a listed company to:

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Approve the transaction before the terms of the transaction are agreed upon; and

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Ensure that the transaction is fair and reasonable to the listed company and is also in the best interests of the listed issuer. Note that the sub-paragraphs of (1), (2), (3), (4), and (9) do not apply to a related party transaction where the value of the transaction is less than RM250,000.

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Using these rules, we examined a series of announcements of companies and various trails of transactions.

In one of our flowchart analysis, we were puzzled by a transaction which showed that if a director sells his shares and resigns, he is able to buy an asset from the same previously linked PLC after six months and one day.

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And, in this situation, the PLC is exempted from obtaining shareholders' approval prior to the completion of the transaction.

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We also noted that if a person is a director or chairman on both sides of the transaction but doesn't own any shares in either company, this situation is also not considered a RPT.

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We also reviewed some questions by the regulator and the responses by PLCs on their relevant websites. We were amazed that a PLC can actually state that they are unable to disclose an exact date of a contract due to confidentiality or refuse to provide details of substantial shareholders of a company, stating that this information is confidential. For some of the transactions we reviewed, we wondered what went into the details of the valuation, as the purchase consideration was “negotiated on a willing buyer, willing seller basis.”

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We would have thought that there should have been a higher level of transparency when PLCs enter into business transactions involving special relationships. This is just to ensure that all parties are on a level playing field with full disclosure of information that is provided on a timely basis.

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Similarly, we would have thought that there should be a heightened level of transparency in the valuation process, and a detailed explanation as to how the board reviewed such a transaction.

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As potential investors, we were looking for:

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The basis for the consideration.

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Is it fair and beneficial to the company and minority shareholders?

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Is the “willing buyer and willing seller” statement too ambiguous?

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We would have thought that someone would have asked:

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1. Can a PLC buy a strategic asset, only to sell the asset soon after to a previous shareholder/director; and then buy back the same from the previous owner?

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2. And because this was done after six months and one day, this is not a related party transaction?

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3. And shareholders are informed after the transaction is completed as long as there is board approval?

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We are not against all related party transactions and sometimes the reasons for taking such steps are not clear to us. But having said that, we urge investors to thoroughly scrutinise transaction trails to ensure that nothing slips through the cracks, as this due diligence could ultimately protect your capital invested.