Monday, April 04, 2011

European Corporate Governance Forum Proposes Guidelines for Related Party Transactions

Noting that related party transactions are an important area of corporate governance, the European Forum for Corporate Governance recommended to the European Commission that a number of principles in this area be adopted across the EU. The guidelines provide for more transparency with regard to related party transactions under a scaled regime. Broadly, the Forum believes strongly that directors should provide leadership to companies regarding related party transactions, but cautioned that this authority is not absolute and should be balanced with a requirement to inform shareholders of important developments and in certain instances to seek authorization for their actions either from independent agencies or from the shareholders.

The European Corporate Governance Forum was established by the European Commission to examine best practices in Member States with a view to enhancing the convergence of national corporate governance codes and providing advice to the Commission. The Forum comprises fifteen senior experts representing issuers, investors, academics, regulators, and auditors, whose knowledge of corporate governance is widely recognized. The Forum is set up to drive consensus on key issues, such as related party transactions.

The Forum suggested a number of guidelines for related party transactions. These guidelines build on existing requirements in EU law for disclosure of related party
transactions in company annual reports and related party disclosures required by IAS 24 as endorsed into EU law.

As a threshold matter, the Forum recommended a de minimis standard under which related party transactions representing less than one percent of assets would be exempted from any special reporting requirements, although the independent directors should take particular care to satisfy themselves that the transaction is in the best interest of the outside shareholders.

The Forum suggested that related party transactions representing more than one percent but less than five percent of assets should be publicly announced at the time of the transaction, and the relevant regulator should be notified, with such notification accompanied by a letter from an independent advisor confirming that the transaction is fair and reasonable from the perspective of the outside shareholders. Transactions representing more than five percent of assets or which have a significant impact on profits should be subject to the disclosure and notification requirements and, in addition, should be submitted to a shareholder vote, with the related party precluded from voting.

In all instances, emphasized the Forum, the related party should abstain from any board deliberations about the transaction in question.

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