The FCA has published a Policy Statement indicating how it will implement the new related party transaction ("RPT") requirements in the Revised Shareholder Rights Directive ("SRDII"). The Policy Statement incorporates the final text of the new rules, which relevant companies will be required to comply with from the start of their first financial year beginning on or after 10 June 2019. For 31 December year end companies, that means that they will need to comply from 1 January 2020 onwards.

These new RPT requirements are significant for both premium and standard listed companies. Premium listed issuers will be familiar with the RPT requirements that they are already subject to and that are contained in Listing Rule 11 ("LR11"), but will now need to consider how best to comply with two sets of similar, but different, RPT requirements (the box below entitled "Comparison between LR11 exclusions and DTR7.3 exclusions" highlights some of the key differences between the two sets of requirements). Standard listed issuers, on the other hand, will need to grapple with becoming subject to RPT requirements for the first time and consider what, if any, processes or policies to put in place to ensure compliance.

Where can you find the new RPT rules?

The new RPT rules are located in the Disclosure Guidance and Transparency Rules ("DTRs"), specifically DTR1B.1 and DTR7.3 (which is a new section in chapter 7 of the DTRs).

Who do the new RPT rules apply to?

The new RPT rules apply to the following:

  • UK incorporated companies whose shares carrying voting rights are admitted to trading on an EEA regulated market (this includes those with a premium or standard listing of shares); and
  • certain non-EEA issuers i.e. issuers incorporated overseas with shares or GDRs admitted to the FCA's Official List (this includes those with a premium or standard listing of shares, close ended investment funds with a premium listing and sovereign-controlled companies with a premium listing of GDRs) that are not already required to comply with RPT rules imposed by another EEA state that correspond with DTR7.3 (these issuers are referred to in the Policy Statement as "Rest of the World issuers" or "RoW issuers").

The new rules will not apply to GDR issuers (other than sovereign-controlled companies with a premium listing of GDRs).

Will premium listed issuers already complying with LR11 need to consider how the new RPT rules apply, or can they ignore them?

Premium listed issuers cannot ignore these new rules. They will need to comply with both LR11 and DTR7.3. Although DTR7.3 includes a specific guidance provision to reassure issuers that where they have met the disclosure and approval requirements in LR11, this will also satisfy compliance with the disclosure and approval requirements in the new DTRs for the transactions in question,1 LR11 and DTR7.3 are entirely separate regimes and need to be treated accordingly. Notably, there are some instances where DTR7.3 would apply to a transaction by a premium listed issuer, but LR11 would not. This is due to:

What is an RPT for the purposes of DTR7.3?

The definition of related party in DTR7.3 follows the SRDII definition. It cross refers to the definition for accounting purposes in international accounting standards (IAS 24) by stating that "a "related party" has the meaning in IFRS." This is different to the definition of related party contained in LR11.1.4. The definitions of "related party transaction" are similar, but again not identical in LR11 and DTR7.3, with DTR7.3 specifically including transactions, arrangements or similar with related parties on non-market terms as related party transactions, rather than this just being a factor to have regard to when assessing whether a transaction is in the ordinary course of business. As a result, there are some instances in which DTR7.3 may apply, but LR11 would not.

Rest of the World issuers benefit from a slightly less onerous regime. They are permitted to use either the definition of 'related party' in IFRS, or the definition of "related party" in the equivalent2 accounting standards that they use to prepare their consolidated annual financial reports (i.e. a US issuer reporting in accordance with US GAAP could use the US GAAP definition of related party).

What is a "material" RPT?

A "material" RPT is an RPT where any percentage ratio (calculated in accordance with tests set out in a new DTR7 Annex 1 which mirror the class tests set out in LR10 Annex 1 as far as possible) is 5% or more. The FCA consultation had suggested that this figure would be 25%, but based on feedback they decided to lower it to 5%.

What do the new RPT rules require?

The new RPT rules require a relevant issuer to:

  • make an announcement regarding a material RPT (including the name of the related party, the nature of the relationship, the date and value of the transaction and any other information necessary to assess whether it is fair and reasonable) via a Regulatory Information Service (RIS) no later than the time when the RPT, or related agreement, is agreed;
     
  • obtain board approval for the material RPT before it is entered into; and
     
  • ensure that any director who is (or an associate of whom is) the related party, or who is a director of the related party, does not participate in the board's consideration of the material RPT, or vote on the relevant board resolution.

To lower the compliance burden, Rest of the World issuers are only subject to the disclosure requirements set out above (and not the requirement to obtain board approval for transacting with a related party).

All issuers are also required to:

  • establish and maintain adequate procedures, systems and controls to enable them to assess whether a transaction with a related party is in the ordinary course of business and has been concluded on normal market terms; and
     
  • ensure that the related party (and any person who is an associate, director or employee of the related party) does not take part in the assessment above.

Do relevant issuers need to aggregate non-material RPTs with the same related party over a 12 month period?

Yes, RPTs with the same related party (and any of its associates) in any 12 month period must be aggregated for these purposes and, once the 5% materiality threshold is reached, both the board approval and disclosure requirements apply to all of the aggregated transactions, and not just the one that results in the materiality threshold being reached. This is different to the position under LR11, which provides for the approval and disclosure of the transaction that triggers the materiality threshold, along with a description of the earlier aggregated transactions. The FCA has acknowledged some market respondents' concerns that issuers will struggle to comply with these new requirements in practice. This is because, to comply, any earlier transactions would need to have been announced at the time when their terms were agreed, at which point the company may not know whether the materiality threshold will be triggered over the 12 month period. The FCA noted that SRDII provided no flexibility in this respect and therefore advised that issuers proposing to enter a series of transactions with the same related party should plan for how they will meet their future obligations if they exceed the 5% materiality threshold on an aggregated basis.

Are there transactions that DTR7.3 does not apply to?

Yes, DTR7.3.5 sets out a number of transactions to which DTR7.3 does not apply. This is a different and narrower list of transactions than those that are excluded under LR11 Annex 1. We set out a comparison of the exclusions under the two regimes in the box below "Comparison between LR11 exclusions and DTR7.3.5 exclusions".

In particular note that:

  • the FCA acknowledges that class testing JV arrangements under LR11 can be complex for issuers in the extractive industries that are required to have local partners and encourages issuers to engage with the FCA on how the subsidiary exemption under the new RPT rules will work in practice; and
     
  • the FCA has exempted directors' remuneration transactions that comply with the UK Companies Act 2006 ("CA 2006") from the scope of the RPT rules. However, as Rest of the World issuers do not comply with the UK company law, no equivalent exemption has been provided for those issuers. In practice, this means that, subject to meeting the materiality threshold (which in many cases will be unlikely), remuneration paid to directors may be disclosable by Rest of the World issuers if the director is a related party and the transaction is not in the ordinary course of business and concluded on normal market terms.

When will the new RPT rules take effect?

  • Issuers that are within scope are required to comply with the new requirements from the start of their first financial year beginning on or after 10 June 2019. For 31 December year end companies, that means that they will need to comply from 1 January 2020 onwards.

Action to take now

Standard listed issuers

  • Draw up a list of the company's related parties (as defined in DTR7.3);
     
  • In order to assess the likely impact of the new rules, consider any transactions that have taken place with the company's related parties over the last couple of years and whether they would have qualified for disclosure under the new rules;
     
  • Brief the board on the new requirements and the likely impact on the company in the future, bearing in mind the identity of the company's related parties; and
     
  • Consider how best to ensure that the company complies with the new rules, in particular the requirement to establish and maintain adequate procedures, systems and controls to enable the assessment of whether a transaction with a related party is in the ordinary course of business and has been concluded on normal market terms. This could involve:
     
    • appropriate training for relevant individuals;
       
    • the creation of new systems and processes to ensure and track compliance; and / or
       
    • the adoption a Related Party Transaction policy which sets out the obligations in DTR7.3 and how the company will comply with them.

Premium listed issuers

Consider the same actions as for standard listed issuers, but also:

  • Familiarise yourself with the differences between the requirements under LR11 and DTR7.3;
     
  • Consider how the current systems and controls in place for the purposes of compliance with LR11 will need to be adapted to also ensure compliance with DTR7.3;
     
  • If you already have a Related Party Transaction policy, update it now to take account of the requirements in DTR7.3; and
     
  • If you do not have a Related Party Transaction policy, look again at the merits of adopting one in order to aid compliance with both LR11 and DTR7.3.

Comparison between LR11 exclusions and DTR7.3 exclusions

LR11 exclusions DTR7.3 exclusions
The requirements set out in LR11 do not apply to the following:
  • transactions, arrangements or similar in the ordinary course of business (in assessing this, look at the size and incidence of the transaction and also whether the terms and conditions of the transaction are unusual);
  • a transaction or arrangement (or a series of transactions or arrangements over a period of 12 months with the same related party which are aggregated) where each percentage ratio is equal to or less than 0.25%; and
  • a transaction agreed (and not amended, or involving the exercise of discretion) before the person became a related party.
In addition, as long as the transaction does not have any unusual features, the requirements in LR11 do not apply to the following:
  • certain issues of new securities and sales of treasury shares in connection with a pre-emptive offering or the exercise of conversion or subscription rights;
  • certain grants of credit (including the lending of money or the guaranteeing of a loan) by, or to, a related party;
  • certain transactions in connection with the an employees' share scheme or a long-term incentive scheme;
  • the grant of a director indemnity, providing a D&O insurance policy or providing a loan or assistance to a director if the relevant indemnity, D&O insurance or loan is provided in accordance with CA 2006, or, for non-UK incorporated entities, if the indemnity or D&O insurance policy would be permitted under CA 2006 if it applied;
  • certain underwriting commitments given by a related party;
  • certain joint investment arrangements (subject to the issuer advising the FCA that the amount invested or provided by the related party, or by the issuer (or its subsidiary), as applicable, is not more than 25% of the amount invested and a sponsor providing certain confirmations to the FCA); and
  • transactions where the other party to the transaction is only a related party because of its relationship with an insignificant subsidiary of the issuer (i.e. one which contributed less than 10% of the profits of, and represented less than 10% of the assets of the issuer over a given period).
The requirements set out in DTR7.3 do not apply to the following:
  • a transaction, arrangement or similar in the ordinary course of business and concluded on normal market terms;
  • a transaction (or a series of transactions or arrangements over a period of 12 months with the same related party which are aggregated) where each percentage ratio is less than 5%;
  • a transaction or arrangement between the issuer and:
(i) any of its wholly owned subsidiaries; or

(ii) any of its other subsidiaries (see the section 1162, CA 2006 definitions of parent and subsidiary undertaking) in circumstances where no other related party of the issuer has an interest in the relevant subsidiary;
  • for UK incorporated issuers only, a transaction or arrangement regarding remuneration of a director of the issuer where the remuneration is in accordance with the issuer's remuneration policy that has been approved in accordance with CA 2006; or
  • a transaction offered to all shareholders of the issuer on the same terms where equal treatment of all shareholders and protection of the interests of the issuer is ensured.
LR11 modifications DTR7.3 modifications
The requirements set out in LR11 are modified if a transaction or arrangement (or a series of transactions or arrangements over a period of 12 months with the same related party) meets the following materiality threshold: all percentage ratios are less than 5%, but one or more percentage ratios exceeds 0.25%).

Companies only need to obtain a fair and reasonable confirmation from a sponsor and make an announcement via a RIS regarding a smaller RPT. They do not need prior shareholder approval for a smaller RPT.
The requirements set out in DTR7.3 are modified if the issuer is a Rest of the World issuer.

Rest of the World issuers only need to make an announcement via a RIS regarding a material RPT. They do not need prior board approval for a material RPT.

 



[1] DTR7.3.11.

[2] i.e. accounting standards that are deemed equivalent for the purposes of the Transparency Directive. 

 

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