By Arra B. Francia, April 5 2019; Business World
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THE SECURITIES and Exchange Commission (SEC) wants publicly listed companies (PLC) to disclose material related party transactions (RPT) as part of efforts to better protect minority investors and improve corporate governance.
The corporate regulator is accepting comments for its draft Rules on Material Related Party Transactions for Publicly Listed Comments, which defines RPTs as a “transfer of resources, services or obligations between a reporting PLC and a related party, regardless of whether a price is charged.”
Such transactions will be considered material RPTs when the transaction amounts to at least 10% of a company’s total assets.
Related parties include “the company’s subsidiaries, affiliates and any party — including their subsidiaries, affiliates and special purpose entities — where the company exerts direct or indirect control or which exerts direct or indirect control over the company.”
Related parties may also pertain to a “company’s directors, officers, shareholders and related interests and their spouses and relatives within the fourth civil degree of consanguinity or affinity, legitimate or common-law, as well as corresponding persons in affiliated companies.”
Under the draft rules, the SEC will require a public company to adopt a groupwide material RPT policy. Guidelines should include the identification of related parties, coverage of material RPT policy, materiality thresholds, identification and prevention or management of potential or actual conflicts of interest, among others.
Listed firms must also file reports on any material RPT within three calendar days after conduct of the transaction. Such disclosures should include the complete name of the related party, the company’s relationship with the party, the financial or non-financial interest of the related party, and the transaction date.
In addition, the disclosure must state the type and nature of transaction as well as the description of assets involved, the contract price, and the rational for the transaction.
Companies must further disclose their material RPT policies on their company Web sites.
The draft rules seek to protect the corporate sector, the securities and investment instruments market, capital market participants and the investing public from abusive transactions and practices that may hamper business development in the country.
“We recognize how related-party transactions may create financial, commercial and economic benefits to the individual institutions and the entire group,” SEC Chairman Emilio B. Aquino said in a statement.
“However, we are equally aware of how such dealings could be abused to transfer assets and profits to controlling shareholders’ vested interests or seize bigger control in companies, among others, to the detriment of minority investors.”
The corporate regulator has proposed to impose fines of up to P40,000, in addition to a daily penalty of up to P400, for companies that fail to comply with the rules. A fourth offense will constitute the grounds for suspension or revocation of the company’s registration or secondary license.
The SEC said the new rules should help improve the Philippines’ performance in the World Bank Group’s Ease of Doing Business survey, especially on the indicator for Protecting Minority Investors. The Philippines improved to 132nd out of 190 economies in terms of protecting minority investors in the Doing Business 2019 report from 146th in the preceding report, even as its overall rank dropped 11 spots to 124th from 113th in the same reports.