Related Party Transactions for Charitable Public Companies

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By Alison Sadler, Lawyer

Background

We have noticed a trend in recent times with the Australian Charities and Not-for-Profits Commission (ACNC) formally investigating those charities which have disclosed related party transactions in their financial reports. Accordingly, we have prepared a brief article discussing the possibility of related party transactions arising between entities that are public companies limited by guarantee and registered charities with the ACNC.

These entities will be regulated by the related party transaction provisions contained in both the:

  • Corporations Act 2001 (Cth) (Corporations Act) which is administered by the Australian Securities and Investments Commission (ASIC); and
  • Governance Standard 5 which is administered by the ACNC.

We will consider the related party transaction provisions in the Corporations Act and Governance Standard 5 in this article.

Corporations Act

What is a related party?

Section 228 of the Corporations Act contains a list of parties that are to be considered related parties of a public company. These include:

  • controlling entities of the company;
  • directors (of the company, or of any entity controlling the company);
  • persons making up a controlling entity of a public company (where the entity is not a body corporate); and
  • spouses, parents and children of the persons listed above.

Please note that if the entity holds a licence under section 150 of the Corporations Act, which allows the entity to omit “Limited” from its name, then the related party provisions in the Corporations Act would not apply.

What is a related party transaction?

A related party transaction is any transaction through which a public company provides a financial benefit to a related party. Please see the diagram below.

Section 229 of the Corporations Act provides some examples of giving a financial benefit to a related party which include:What is a “financial benefit”?

  • giving or providing the related party with finance or property;
  • buying an asset from or selling an asset to the related party;
  • leasing an asset from or to the related party;
  • supplying services to, or receiving services from, the related party;
  • issuing securities or granting an option to the related party; and
  • taking up or releasing an obligation of the related party.

Are related party transactions prohibited?

In order to protect the interests of a public company’s members as a whole, section 208 of the Corporations Act requires the public company to obtain approval from its members when proposing to give a financial benefit to a related party. There are also exceptions to this requirement in sections 210-216 of the Corporations Act.

Governance Standard 5

What is a related party?

‘Related parties’ is not a defined term in Governance Standard 5. Accordingly, the ACNC relies on AASB 124 Related Party Disclosures for the definition of the term ‘related party’. The following are therefore related parties of a registered charity:

Individuals

  • a person (or a close member of their family) who is connected to the charity and who has control or joint control of the charity, such as a Responsible Person (this means a director of the charity);
  • a member (or a close member of their family) of the key management personnel of the charity (this means the people with authority and responsibility for planning, directing and controlling the activities of the charity directly or indirectly);

Entities

  • an organisation that is connected to the charity and has control or significant influence over the charity, such as a parent entity of the charity;
  • an organisation that the charity has control or significant influence over, such as a subsidiary entity;
  • any organisation and the charity that are members of the same group (for example, fellow subsidiaries); and
  • an associate (an entity over which the charity has significant influence) or joint venture (a joint arrangement whereby the charity with another entity or other entities have joint control of the arrangements and have rights to the net assets of the arrangement).

This means that, unlike the situation with the Corporations Act where only financial benefits from the public company to the related party are captured, the ACNC not only regulates transfers of resources, services and obligations from the charity to a related party, but if the related party is also a charity, the ACNC will look at both sides of the transaction.

Please see the diagram below for further explanation.


What is a related party transaction?

Related party transactions are also not defined in Governance Standard 5. A related party transaction is defined in AASB 124 as a transfer of resources, services or obligations between a charity and a related party, regardless of whether a price is charged.

The ACNC provides some examples of related party transactions which include:

  • purchases, sales, donations;
  • receipt of goods, services or property;
  • leases;
  • transfers of property including intellectual property;
  • loans;
  • guarantees; and
  • provision of employees on a paid or complementary basis.

Are related party transactions prohibited?

Unlike the Corporations Act, the Governance Standards do not generally prohibit related party transactions, nor is there a requirement for the charity to seek member approval before entering into a related party transaction. Instead, the ACNC stresses that charities must comply with the ACNC Governance Standards when entering into a related party transaction.

Complying with both the requirements of the Corporations Act and Governance Standard 5

Following is a summary of the requirements under the regimes of both the Corporations Act and Governance Standard 5 – if a public company determined to give a financial benefit to a related party, the public company’s board:

  1. must acknowledge that:
    1. the transaction is a related party transaction and Chapter 2E of the Corporations Act will apply; and
    2. if one of the exceptions to member approval for a related party transaction in sections 210-216 of the Corporations Act also applies to the transaction.
  2. must consider the relevant ACNC Governance Standards, which include:
    1. to act honestly and fairly in the best interests of the charity and its charitable purposes;
    2. not to misuse their position;
    3. to disclose any actual or perceived conflict of interest;
    4. to ensure that the charity’s financial affairs are managed responsibly; and
    5. to comply with charity’s related party policy or procedure.

Conclusion

We recommend that charities have a related party policy or procedure to:

  • reduce the risk of decisions being influenced by the interests of others; and
  • ensure that related party transactions do not take place without approval of the charity’s responsible persons (that is, its directors).

Finally, the ACNC’s position is that it is best practice to disclose related party transactions in the financial reports of charities.

For further information, please do not hesitate to contact us.

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