In the recent past, however, certain related-party and interested-party transactions have been undertaken without having due regard to the interests of minority shareholders. The Securities Commission (SC) would therefore want to ensure that such transactions adhere to high standards of corporate governance and disclosure and are carried out in the best interests of listed companies. The same call was made by the Deputy Prime Minister and Minister of Finance in his statement to Parliament on 24 March 1998.
In this respect, the SC wishes to announce that it has completed a review of the rules on related-party and interested-party transactions in the Listing Requirements of Kuala Lumpur Stock Exchange (KLSE) and, after consultations with KLSE and the Association of Merchant Banks in Malaysia, has decided to strengthen the rules in the interest of investor protection. KLSE has been directed to incorporate these changes in its Listing Requirements. These changes and other consequential revisions are reflected in Rules 111 to 120 under Part 4 of the Main Board Listing Requirements and Rules 5.1 to 5.10 under Part 5 of the Second Board Listing Requirements. The revised rules on related-party and interested-party transactions, which come into effect immediately, would serve to enhance the overall framework for corporate governance in listed companies and the SC's own move towards a disclosure-based regulatory environment.
Widened Scope
The scope of the rules on related-party and interested-party transactions has been widened to include transactions not only between a listed company and its directors or substantial shareholders, but also between the listed company and -
- persons connected with the director or substantial shareholder ("connected persons" in this context has the same meaning as that found in section 122A of the Companies Act 1965); or
- parties in which the director, substantial shareholder or any person connected with the director or substantial shareholder has an interest.
The widening of the scope is necessary to ensure that transactions between the listed company and related as well as interested parties adhere to the procedural requirements imposed which, in summary, require the listed company to -
- make a full announcement of the transaction through KLSE;
- send a circular to its shareholders;
- obtain the prior approval of its shareholders in a general meeting for the transaction; and
- ensure that the related or interested party and the connected persons abstain from voting on the relevant resolution approving the transaction.
Enhanced Disclosure
The revised rules call for enhanced disclosure to be made in the announcement and circular to shareholders so as to facilitate informed and reasoned investment decisions by shareholders and investors. The additional disclosure particulars to be made include -
- the details of any liabilities to be assumed by the listed company arising from the transaction;
- the original date and cost of investment to -
- the listed company, in the case of disposal of assets by the listed company to a related or interested party; or
- the related or interested party, in the case of acquisition of assets by the listed company from a related or interested party.
- The source of funds, in the case of an acquisition, to finance the acquisition of assets by the listed company; and
- The proposed utilisation of proceeds by the listed company, in the case of disposal of assets, which is satisfied by cash.
Voting Rights
Under the revised rules, a director or substantial shareholder of a listed company or any person connected with the director or substantial shareholder, with any interest, direct or indirect, in the transaction, would not be allowed to vote.
Appointment of Corporate Advisers
Where a related or interested party transaction is deemed to be an "affected transaction", the listed company would be required to -
- appoint a main corporate adviser, which should be a merchant bank, before the terms of the transaction have been agreed upon; and
- appoint an independent corporate adviser, which should also be a merchant bank, before the announcement for the transaction is made.
The duties and responsibilities of the main corporate adviser are to -
- ensure that the transaction -
- is carried out on fair and reasonable terms and conditions, and not to the detriment of minority shareholders of the listed company; and
- complies with the relevant laws/ regulations/ guidelines, where applicable.
- fully disclose all pertinent details of the transaction in the announcement and circular to shareholders; and
- confirm to KLSE and SC after the transaction has been completed and all the necessary approvals have been obtained that it has discharged its duties and responsibilities with due care in regard to the transaction.
The duties and responsibilities of the independent corporate adviser are to -
- make comments as to the fairness and reasonableness of, and give its recommendation on, the transaction in the circular or independent advice circular, where applicable, to be issued to shareholders of the listed company; and
- confirm to KLSE and SC, within a period of two (2) weeks after the announcement for the transaction is made, that it is eligible to act as an independent corporate adviser.
- The report of the independent corporate adviser evaluating the terms of the "affected transaction" is required to be included, on an abridged basis, in the submission to the SC and/or Foreign Investment Committee, where applicable.
An "affected transaction" is generally taken to mean a substantial transaction (i.e. a transaction which is equal to or exceeds 25% based on various benchmarks/ percentage ratios as prescribed in the Listing Requirements of KLSE). The definition of an "affected transaction", together with the eligible criteria for appointment of an independent corporate adviser, has been stated in full in the Listing Requirements of KLSE.
With the requirement for the appointment of corporate advisers early during an "affected transaction", it is expected that a substantial related-party or interested-party transaction would be conducted on a higher standard of corporate conduct and responsibility.
Directors' Responsibility
The Board of Directors of the listed company, on a collective basis, and not just the independent directors, is expected to ensure that a related-party or interested-party transaction is conducted on sound commercial terms and not undertaken to the detriment of the listed company's shareholders as a whole. In this regard, the Board of Directors, notwithstanding that a director may be a related or interested party, is required to make a statement in the announcement and circular to shareholders disclosing whether or not the transaction is conducted in the best interest of the listed company.
The SC wishes to emphasise that the interests of listed companies should be the primary consideration in related-party or interested-party transactions. In this regard, the SC would monitor closely such transactions. Post-vetting of circulars to shareholders, including independent advice circulars, would be undertaken to check on adequacy and veracity of disclosures and compliance with the rules on related-party and interested-party transactions. Strict sanctions would be meted out against those who are in breach of these rules and who do not adhere to good corporate conduct.
