SHOULDN’T we at least feel a bit nervous when there’s a loosening of the rules on related-party transactions (RPTs) involving listed companies? Can we afford to be more relaxed about the possibility of those controlling a company coming up with deals that hurt the interests of other shareholders?
The Organisation for Economic Co-operation and Development (OECD) once called abusive RPTs as “one of the biggest corporate governance challenges facing the Asian business landscape”. That was in a September 2009 report. Could it be that things are different now?
Certainly Bursa Malaysia thinks it’s time to tweak its framework for RPTs so as to ease the burden of complying with the rules. On Monday, the stock exchange said it had made some key amendments to its listing requirements, including liberalising the RPT rules by dispensing with compliance requirements in instances where “the risk of abuse by a related party is low or theoretical in nature”.
This didn’t happen out of the blue, but then again, not many people would have recalled that the changes had been proposed in a public consultation paper published over a year ago.
In the paper released on Jan 10, 2014, Bursa Malaysia explained: “The key objective of the RPT requirements in the listing requirements is to ensure that a related party does not abuse its position and enter into transactions to benefit itself to the detriment of the listed issuer or its shareholders.
“In this respect, we currently have a comprehensive framework for RPTs to provide adequate level of investor protection. However, the exchange recognises that the current definition of RPT under the listing requirements is broad, and this may sometimes inadvertently apply to transactions where the ‘conflicts of interests’ are theoretical and may not pose any real risks or harm to the shareholders.”
The exchange’s proposed changes for regulating RPTs looked at four aspects.
The first was the monetary limit that exempts small or immaterial transactions from the RPT requirements. The proposal was to double the limits for Main Market companies (from RM250,000 to RM500,000) and ACE Market companies (from RM100,000 to RM200,000). Bursa Malaysia didn’t want to revise the percentage thresholds because it felt that they remained relevant and practical.
The exchange analysed 92 RPTs in 2013 by Main Market companies and found that only about 10% were for values of less than RM500,000. That was the principal basis for the two-fold increase of the Main Market and ACE Market limits.
Another of last year’s proposal was to refine existing exemptions and introduce new exemptions for RPTs. These appear to be minor enhancements so that the RPT rules don’t apply to transactions where the related parties are unlikely to control or exert significant influence over the listed companies, or where the chances of conflicts of interests are slight.
The third set of proposed amendments to the listing requirements were meant to clarify how a closed-end fund should adhere to the RPT requirements.
The proposals above survived the public consultation process and the amended listing requirements came into effect on Tuesday.
However, one proposal in last year’s consultation paper was dropped – that particular proposed amendment to the listing requirements wasn’t put through – and that is worth a discussion.
Bursa Malaysia said it wanted to clarify the role of advisers in relation to RPTs and recurrent RPTs. This stemmed from the requirement that a listed company entering into an RPT above a certain threshold must appoint an independent adviser as well as a principal adviser (in the case of a Main Market company) or a sponsor or adviser (in the case of an ACE Market company).
The exchange reviewed the roles and responsibilities of these advisers to ensure there were no overlapping functions. One of the duties of the principal adviser or the sponsor/adviser is to ensure that the terms and conditions of the RPT is fair and reasonable, and that it’s not detrimental to the minority shareholders.
As a result of the review, Bursa Malaysia proposed that the principal adviser or the sponsor/adviser should instead ensure that the RPT is carried out on arm’s length basis and on normal commercial terms.
That’s an interesting idea because advice on the fairness and reasonableness of deals and offers has come under scrutiny lately because of several instances of advisers concluding that deals and offers are not fair but reasonable, thus justifying recommendations to vote for the deals or to accept the offers.
What has happened since Jan 10 last year that caused Bursa Malaysia to abandon this proposal?
In fact, it can be argued that the requirement has been watered down. Instead of having to ensure that the RPT is carried out on fair and reasonable terms and conditions, and not to the detriment of minority shareholders, the principal adviser is now only asked to advise the listed company whether the RPT is carried out on fair and reasonable terms and conditions, and not to the detriment of minority shareholders.
Bear in mind that the exchange didn’t come up with the proposals in a vacuum; it held focus group sessions in November 2013 to seek the views of industry associations, listed companies and advisers on the major proposed amendments.
Somewhere between the two Januaries, the proposal on what the principal adviser or the sponsor/adviser should focus on, has been moved from the list of regulatory changes under serious consideration, to the heap of discarded ideas.
The Securities Commission publishes response papers that present feedback to its consultation papers and its position on the matters raised in the feedback. This is a fairly common practise among regulators and other institutions that formally solicit the opinion of stakeholders. After all, if you’ve invited the public to comment on your proposals, why not be transparent about the results of the consultation and about your responses to the feedback?
An enlightened organisation, particularly one with a regulatory role, should have no qualms being open about the processes and thinking that lead to rule changes.
Executive editor Errol Oh is curious about how advisers would have ensured that RPTs are carried out on arm’s length basis and on normal commercial terms.