RELATED PARTY TRANSACTION (RPT): A CLOSER LOOK
A Related Party Transaction (RPT) is defined as a transaction entered into by a company or its subsidiaries which involve the interest, direct or indirect, of a related party.
Related Party refers to the director, major shareholder or persons connected with any such director or significant shareholder.
In a basic definition, RPT refers to any transaction involving the acquisition or disposal of interests in securities/assets by a company or any of its subsidiaries from or to a related party.
The interest need not be financial or monetary interest.
In addition, Section 7 of Companies Act 2016 defines a corporation deemed to be related to each other if:
(a) it is the holding company of another corporation;
(b) it is a subsidiary of another corporation; or
(c) it is a subsidiary of the holding company of another corporation
Diagram 1 is one of the examples of a related party.
They are related to each other in this manner:
The parent company (Company GG) and subsidiary company (Company XX) is a related party.
The parent company (Company GG) and associate company (Company TT) is a related party.
The subsidiary company (Company XX) and associate company (Company TT) is a related party.
The transaction flow, then, could look something like this:
Company TT (sells to) –> Company GG (sells to) –> Company XX and Direct to Consumer.
However, the related party in the joint venture company will be a little bit different.
Based on Diagram 2, JV Co. and Company QQ is a related party.
JV Co. and Company KK is a related party.
However, Company QQ and Company KK is not a related party.
RPT is a transaction between the corporation and individuals or other corporations in which the directors of the company or substantial shareholder are connected.
Section 197 of the Companies Act 2016 describes how a person can be connected: 197.(1) A person shall be deemed to be connected with a director if the person is—
(a) a member of the director’s family;
(b) a body corporate which is associated with that director;
(c) a trustee of a trust, other than a trustee for an employee share scheme or pension scheme, under which that director or a member of the director’s family is a beneficiary; Before this, Section 133A of the Companies Act 1965 forbids the provision of financial assistance to individuals connected with a company's directors, including an associated company, prior to this.
Then, on the other hand, Paragraph 8.23 of the Main Marker Listing Requirements (MMLR) of the Bursa Malaysia Main Marker Listing Requirements (MMLR) specifies that, except as otherwise provided for by law and subject to certain pre-conditions, a public listed company or its non-listed subsidiaries can grant financial assistance in the form of advance payments, guarantees and compensation or in the form of collateral for the debt owed to its affiliated company.
Moreover, with the intention of modernizing the Malaysian corporate legal system, the Malaysian Companies Bill 2015 did not bring greater clarification apart from the significantly escalating penalties levied on directors upon conviction.
However, Section 225 of Companies Act 2016 prohibits the company from giving a loan or providing security for a loan granted to a person connected with the director of its holding company.
Section 225 specifically provides that:
Prohibition of loans to persons connected with directors
225. (1) Subject to the provisions of this section, a company, other than an exempt private company, shall not—
(a) make a loan to any person connected with a director of the company or of its holding company, or
(b) enter into any guarantee or provide any security in connection with a loan made to such person by any other person.
Furthermore, pursuant to Section 221(3), a director shall not be considered to be involved in any contract or contract offered solely on grounds
(a) of any loan to a company guaranteed by the director or of a party to the loan; or
(b) of any loan to a company guaranteed by the director or of a party to the loan for the benefit of a company pursuant to Section 7 shall be deemed to be connected to the company that is the director of that company. Moreover, RPT is risky and are scrutinised because directors may enter into certain transactions at a massively overvalued or undervalued price at which the director derives a personal gain to the companies’ detriment of the businesses.
Section 228 of the Companies Act 2016 clarifies transactions with directors, major shareholders or associated individuals:
228. (1) Subject to subsection (2) and section 229, a company shall not enter or carry into effect any arrangement or transaction where a director or a substantial shareholder of the company or its holding company, or its subsidiary, or a person connected with a director or substantial shareholder—
(a) acquires or is to acquire shares or non-cash assets of the requisite value, from the company; or
(b) disposes of or is to dispose of shares or non-cash assets of the requisite value, to the company.
This means that the transaction would be void unless shareholder approval is obtained at a general meeting or company approval at a Board meeting. Provided under Section 228 of Companies Act 2016 unless—
(a) the entering into the arrangement or transaction is made subject to the approval of shareholders at a general meeting; or
(b) the carrying into effect of the arrangement or transaction has been approved by shareholders at a general meeting.
This will confuse things further when any of the subsidiaries in the above case may be partly owned, with or without majority control, rather than fully owned (and thus, voting control).
Therefore, if a corporation has a complex arrangement between its holding company, various subsidiaries and/or associates and other related parties, it is worth investigating and recognizing any related party transactions that might take place.
Management may also use related party transactions to obscure sales issues, making matters worse, or making current revenues sound better than fact.
It may be said that it is possible to perform RPT, however dangerous.
It should require the approval of shareholders.
The interested director of the RPT shall notify the Board of Directors of the Company at the General Meeting of the Company of the specifics of the existence and extent of his concern, including all matters relating to the proposed transaction that he is aware of or should reasonably be aware of, which are not in the Company's best interest.
A director with an interest, direct or indirect, shall abstain from deliberating and voting on the relevant resolution with regard to the RPT at the meeting of the Board.
Same goes for the director or major shareholder with any interest, direct or indirect, or an individual linked to them at a general meeting to receive shareholder approval shall not vote on the resolution authorizing the transaction.