Gerry Cawson and Mark Ferraretto consider how to avoid being involved in an improper transaction.
The Corporations Act regulates how public companies deal with entities related to them, including their directors and those directors’ families. But these related party provisions extend beyond public companies. Anyone ‘involved’ in a ‘related party transaction’ can fall foul of the Corporations Act if the transaction is not carried out correctly.
A ‘related party transaction’ is a transaction that confers a financial benefit on a ‘related party’. That benefit could arise directly (for example, as a result of a cash payment to a director or their spouse or to another entity controlled by them) or indirectly (for example as a result of a sale of shares at below market value to an entity in which the director has a financial interest). The Corporations Act doesn’t prevent these kinds of transactions but it does regulate them and it imposes civil penalty provisions for anyone who is ‘involved’ in a transaction that breaches these provisions (and imposes fines or jail time if their involvement was dishonest).
If you’re a director of a company that is asked to approve a share transfer you may be ‘involved’ in the transaction to which that share transfer relates. If that transaction is a ‘related party transaction’ and not undertaken in accordance with the Corporations Act, you may be liable.
What does ‘involved’ mean? Firstly, it’s important to note that ‘involved’ means more than being a party to a transaction. A person could be ‘involved’ in a breach if that person directly or indirectly participates in the transaction and knows, or should know, that the transaction is improper.
Participation is usually easy enough to work out. For example, registering an improper share sale probably makes you indirectly part of the sale transaction. However, you won’t have any liability if you didn’t know (or should not have known) that the transaction was improper.
Given this, it is important to understand what amounts to knowledge. This is a lot less clear. The courts haven’t set concrete rules as to what amounts to knowledge. Actual knowledge is obviously enough but wilful blindness to the possibility of an improper transaction, or knowledge of facts that would put a reasonable person on notice to such a possibility, could also amount to knowledge.
Given this, if a public company asks you to approve a transfer of shares in your company you may wish to undertake your own reasonable enquiries to ensure that the transfer isn’t improper. These could include:
- enquiries of the public company to confirm whether the transfer gives rise to a direct or indirect financial benefit to a related party of the public company;
- undertaking searches of the ASIC register to identify whether the transferee is a related party of the public company or if any of the identified related parties of the public company are directors or shareholders in the transferee.
If you want to better understand your responsibilities in relation to not being involved in an improper related party transaction, please contact Gerry Cawson.