New material related party transaction disclosure rules
Credit to Author: EUNEY MARIE MATA-PEREZ| Date: Wed, 22 May 2019 16:18:06 +0000
To promote good governance and protect minority stockholders, the Securities and Exchange Commission (SEC) recently issued Memorandum Circular No. 10, Series of 2019, promulgating the Rules on Material Related Party Transactions for Publicly-Listed Companies. The rules became effective on April 27, 2019.
The rules recognize that related party transactions (RPTs) between and among related parties may create financial, commercial and economic benefits to individual institutions and to the group which they belong. While RPTs are generally allowed, they are required to be disclosed by publicly-listed companies (PLCs) if they are considered material.
The rules define a material RPT to refer to a transfer of resources, services or obligations between a PLC and a related party, either individually or in aggregate over a 12-month period with the same related party, amounting to at least 10 percent of the listed company’s total assets based on its latest audited financial statement. The term is defined broadly to include transactions entered into with an unrelated party that subsequently becomes a related party. If the reporting entity is a parent entity, the 10 percent threshold is based on its consolidated financial statements.
The rules define ‘related parties’ to include a PLC’s directors, officers, substantial shareholders (any person who is directly or indirectly the beneficial owner of more than 10 percent of any class of the PLC’s equity security), and their spouses or relatives within the fourth civil degree of consanguinity or affinity, whether legitimate or common-law, if these persons have control, joint control or significant influence over the PLC. It also covers the PLC’s parent, subsidiary, fellow subsidiary, affiliate joint venture or an entity that is controlled, jointly controlled or significantly influenced or managed by a person who is a related party.
It should be a PLC’s overarching policy for material RPTs to be compliant with laws, to be at arm’s length basis and not to place any stockholder or stakeholder at a disadvantage. Thus, the rules also require listed companies to adopt and submit to SEC a material RPT policy which shall cover all entities in a group or conglomerate. Such policy shall include the following at the minimum: a) identification of related parties; b) coverage of material RPTs; c) adjusted thresholds; d) identification and prevention or management of potential or actual conflicts of interest which may arise out of or in connection with material real property transactions; e) guidelines in ensuring arm’s length terms; f) approval of material RPTs; g) self-assessment and periodic review of RPT policy; h) disclosure requirement of material RPTs; i) whistle-blowing mechanisms; and j) remedies for abusive material real property transactions.
The rules require that material RPTs be approved by at least two-thirds (2/3) of the entire membership of the board, with at least a majority of the independent directors voting to approve the contract. If such votes are not obtained, the material RPT should be ratified by stockholders representing 2/3 of the company’s outstanding capital stock.
The rules further require PLCs to file with the SEC an Advisement Report within three calendar days from the execution of material RPTs. In addition, PLCs are required to include a summary of all of its RPTs in its Integrated Annual Corporate Governance Report, which is filed on or before May 30 of each year with the SEC.
Non-filing or late filing or the incomplete or incorrect signature in the policy will be subject to a basic penalty of P10,000 and monthly penalty of P1,000. The monthly penalty will continue to accrue until the material RPT policy is submitted to the SEC.
Non-filing or late filing of advisement report will also entail the imposition of penalties which can be a reprimand for first offense, penalty of P30,000 for second offense and P40,000 for third offense, in addition to daily penalties as high as P400 per day. Filing of incorrect or incomplete advisement report shall also be subject to penalties which can be as high as P20,000 for third offense plus daily penalties of P400 per day. If a PLC does not pay the assessed fine and/or failure to comply with the requirement within a period of 15 days after notice and hearing, SEC is empowered to take other appropriate action or remedies available under Section 158 of the Revised Corporation Code of the Philippines.
Further, the commission of fourth offense for the same violation is ground for the suspension or revocation of the erring company’s registration or secondary license, after due notice and hearing.
In addition to the foregoing, an interested director or officer of a corporation shall be disqualified from being a director, trustee or officer of any other corporation for abusive material RPTs. The disqualification, however, shall be imposed only after final judgment is rendered by a court of competent jurisdiction against the interested director or officer and shall be for a period of at least one year, as may be determined by the SEC.
The foregoing penalties shall be without prejudice to other penalties which the SEC may impose, or which may be imposed under other laws, such as the Revised Securities Regulations Code.
The passage of the rules is a welcome development as it seeks to protect minority stockholders, as well as other stakeholders of PLCs.
Euney Marie J. Mata-Perez is a CPA-Lawyer and the Managing Partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer. She is the President of the Asia-Oceana Tax Consultants’ Association. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com
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