The Securities and Exchange Commission plans to require all publicly-listed companies to disclose material related party transactions to promote good corporate governance and protect minority investors.
The SEC issued on March 26 the draft Rules on Material Related Party Transactions for Publicly Listed Companies for public comment.
“The proposed rules are aimed at protecting the corporate sector, the securities and investment instruments market, capital market participants and the investing public from abusive transactions and practices hampering the development of businesses in the country,” SEC chairman Emilio Aquino said.
“We recognize how related-party transactions may create financial, commercial and economic benefits to the individual institutions and the entire group. However, we are equally aware of how such dealings could be abused to transfer assets and profits to controlling shareholders’ vested interests or seize bigger control in companies, among others, to the detriment of minority investors.”
Aquino also said the issuance of the rules would increase the country’s score on the Ease of Doing Business survey conducted by the World Bank, particularly on the Protecting Minority Investor indicator of the said survey.
The draft rules define an RPT as a transfer of resources, services or obligations between a reporting publicly listed company and a related party, regardless of whether a price is charged. It also covers outstanding transactions entered into with an unrelated party that subsequently becomes a related party.
Related parties include the company’s subsidiaries, affiliates and any party, including their subsidiaries, affiliates and special purpose entities, where the company exerts direct or indirect control or which exerts direct or indirect control over the company.
The company’s directors, officers, shareholders, and related interests, and their spouses and relatives within the fourth civil degree of consanguinity or affinity, legitimate or common-law, as well as corresponding persons in affiliated companies, are also considered as related parties.
A covered company should comply with the proposed rules when any RPT either entered into individually or over a 12-month period amounts to 10 percent or higher of the company’s total assets.
The draft rules require listed companies to adopt group-wide material RPT policy, which should include the identification of related parties, coverage of material RPT policy, materiality thresholds, identification and prevention or management of potential or actual conflicts of interest which may arise out of or in connection with material RPTs and guidelines in ensuring arm’s length terms.