Wednesday, November 27, 2013

Guest Post: New Regime of Corporate Governance: Heading Towards “Hung” Companies – Part 2

[The following post is contributed by The following post is contributed by Nivedita Shankar, who is a Senior Associate at Vinod Kothari & Co. She can be reached at nivedita@vinodkothari.com.

The views expressed herein are solely those of the guest author and cannot be ascribed to the other contributors of this Blog.

This is a continuation from the previous post in this series]

Precedents around the world

United States

Clause 314 of NYSE Listed Company Manual considers the Audit Committee as an appropriate forum to review a related party transaction. The Exchange also reviews proxy statements and other SEC filings, disclosing RPTs and where such situations continue year after year, the Exchange after evaluation also determines whether such RPTs should be permitted to continue.

Under Regulation S-K of U.S. Securities Law, Item 404 requires public companies to disclose transactions involving amounts of more than USD1,20,000/- in which the related person is or has had direct or indirect material interest.

United Kingdom

Financial Reporting Standard-8 require companies to make adequate disclosures in their financial statements to draw attention to the possibility that the reported financial position and results may have been affected by the existence of    related parties and by material transactions with them. Further, under the Companies Act, 2006, members’ approval is required for any transaction with the director or if the director is connected in such transaction.

Hong Kong

Rule 14A of Listing Rules of the exchange in Hong Kong requires companies to take prior approval of shareholders in case of connected transactions. Any connected person with material interest shall not be permitted to vote at the meeting on the resolution approving the transaction. The manual further requires that the Independent Board Committee of the company should appoint a financial adviser to advise the company’s shareholders about whether the terms of the connected party transactions are fair and reasonable and in the interest of the company and the shareholders as a whole.

Singapore

The Singapore Exchange Listing Manual requires only disinterested shareholders to vote on any transaction involving interested person. “Interested Person” has been defined to mean a director, CEO or controlling shareholder and an associate of any of these.

Malaysia

The Bursa Malaysia Listing Requirements lay down provisions similar to Hong Kong. Rule 10.08 requires disclosure in case of a related party transaction to the Exchange where the value of the consideration is less than RM 2,50,000 or is a recurrent related party transaction, where the percentage ratio is 0.25% or more. Where any one of the percentage ratios[1] of a related party is 25% or more the company must appoint a Principal Adviser to ensure that such transaction is carried out on fair and reasonable terms and conditions and not to the detriment of the minority shareholders. The stated Requirement debars any interested director from taking part in board deliberations and abstain from voting on such related party transactions. Further, any interested director or major shareholder must ensure that connected persons abstain from voting on such related party resolutions in the general meeting.

Section 188 of Act, 2013 on the same lines as other countries across the world prohibits interested shareholders from voting on related party transactions. The concept of appointing an independent financial adviser for such transactions has not been mandated yet.

Conclusion

What is noticeable is that around the world, including India, RPTs have been given due importance and a lot of thought has gone into preventing such transactions from affecting the business of the company. This thought process has also made the minority or disinterested shareholders an active part of the business of the company. But in the process, the corporate balance has also tilted towards the minority which cannot be good news.

It is similar to a hung parliament where two or three parties which have enough of a  majority to block a particular agenda make not only the ruling party succumb to their pressure, but also bring the parliament to a stand still. In effect this leads to instability in the functioning of the parliament.

A similar situation can be envisaged if the power balance is in the hands of the minority in a company. In this age when the corporates are governed by the corporate laws, provision like section 188 of Act, 2013 have the potential to make every power block to swing making it impossible for companies to function.

(Concluded)

- Nivedita Shankar


[1] “Percentage ratios” as per Bursa Malaysia Listing Requirements has been defined in Rule 10.02 and is calculated on the basis of various parameters like value of assets, net profits attributable to the transaction, aggregate value of consideration given or received, equity share capital issued by listed issuer as consideration for an acquisition, total assets forming subject matter of transaction etc, compared with the same parameters as that of the listed issuer.

No comments: