Related Party Transactions – why not best practice in Australia?
What is the issue?
Australia likes to think of itself as a sophisticated jurisdiction when it comes to corporate governance, but the lax treatment of related party transactions for listed companies, suggests we have a long way to go.
There are two broad antidotes to avoid abusive related party transactions: systematic and timely disclosure and independent shareholder approval for deals with associated entities or individuals.
Whilst major related party transactions in Australia – think News Corp’s $2.5 billion Queensland Press acquisition from the Murdoch family in 2004 and Seven Network’s $2 billion Westrac acquisition from controlling shareholder Kerry Stokes in 2010 – did go to an independent shareholder vote, we think there are far too many scenarios where shareholders are either not informed or given a vote.
Let’s start with the issue of new shares to a related party. If a major supplier or joint venture partner to an ASX listed company is not represented on the board, it can be issued with up to 15% of the company’s shares at a substantial discount without shareholder approval. Similarly, a substantial holder above the 20% takeover threshold can be selectively issued with 3% of additional stock every 6 months under the so called “creep” provisions, without being considered a related party. EZ Corp relied on an exemption to the Listing Rules governing related party approvals [link to 10.3], which carves out the issuance of shares for cash, when it received a placement at Cash Converters in 2010.
Even when a substantial shareholder is on the board with control, there are limited restrictions on increasing their stake when capital raisings take place. Harvey Norman executive chairman Gerry Harvey increased his stake in 2014 by under-writing a discounted non-renounceable entitlement offer which about 70% of retail shareholders declined to take up.
The US has world’s best practice for disclosure of any benefits paid to relatives of directors or senior management, such as hiring the chairman’s son.
Australia is lagging in this area. Investors only learnt that two children of then Rio Tinto CEO Sam Walsh were employed by the mining company through a newspaper article in 2015 and ABC Learning CEO Eddie Groves approved large payments to his brother in law, Frank Zullo, without disclosure or shareholder approval.
When it comes to triggers for shareholder votes on related party transactions, Australia is lagging.
For instance, shareholders in Macquarie Atlas Roads have not been asked to approve more than $200 million in fees paid to its manager and largest shareholder, Macquarie Group, since the arrangement was first put into place in 2010. Specific approval of such related dealings would be required in other jurisdictions such as Hong Kong and Singapore.
Australia also provides a carve out for related party revenue transactions deemed to be in the “ordinary course of business”. This is why Coca Cola Amatil shareholders were not asked to approve $811 million (see p104 of annual report) Coca Cola Amatil Annual Report worth of purchases in 2015 from its US parent and 29.2% shareholder, The Coca Cola Company.
What would be lost from an annual approval of such arrangements, as would be required in China?
Australia should aspire for world’s best practice in terms of disclosure and shareholder approval of related party transactions and these are the changes we’d like to see:
- Annual approval of revenue transactions with a related party worth more than 5% of revenue, market capitalisation or net assets.
- Independent shareholder approval for any non pro-rata issue of shares to a director, substantial shareholder or associated party.
- US-style disclosure of any payments to relatives of directors, senior executives and substantial shareholders, including the quantum and nature of the payment and the service rendered.
- Shareholder approval for any asset sales or acquisitions to a related party involving cash payments worth more than 5% of market capitalisation or net assets.
Rupert Murdoch and his fellow directors agreed to buy Elisabeth Murdoch’s production company – Shine Group – for more than $700 million in cash in 2011 and neither NYSE or ASX listing rules required shareholder approval.
Founder, substantial shareholder and CEO Eddie Groves awarded numerous construction and maintenance contracts for childcare centres to companies controlled by his brother in law, Frank Zullo, but disclosure was limited and none of these payments were ever approved by shareholders.
The three executive directors – John Kirby, Robert Kirby and Graham Burke – have controversially voted their combined 42% stake in favour of the remuneration report since 2004. However, in 2015, Robert’s son Clark Kirby signed a statutory declaration claiming not to be associated with his father. This allowed the chief operating officer to be issued Village Roadshow incentive shares valued at $2.1m without shareholder approval.
After agreeing to pay Metcash $283 million in 2015 for its auto business, Burson launched a $217 million entitlement offer. CEO Darryl Abotomey spent just over $2 million taking up his entitlement but this was funded by a company loan which was not approved by shareholders.