Related-party transactions 

Chapter 2E of the Corporations Act 2001 (Cth)¹ addresses a structural risk in public companies: those who control the company deciding to confer benefits on themselves or their associates. The regime does not prohibit such transactions. It requires that the members be told and be allowed to decide.

The basic rule

For a public company, or an entity the public company controls, to give a financial benefit to a related party, one of two things must be true:

• member approval has been obtained in accordance with the statutory procedure, and the benefit is given within 15 months of the approval; or
• the benefit falls within one of the exceptions.

The regime does not apply to proprietary companies. Directors of proprietary companies remain subject to their general duties, and to the statutory duty to avoid conflicts, but Chapter 2E itself does not bite.

What is a financial benefit

The concept is deliberately broad and is to be read widely, with any doubt resolved in favour of the benefit being financial. It includes giving finance or property, buying or selling an asset, leasing, supplying or receiving services, issuing securities, and taking on an obligation.

The statute directs that effect be given to the economic and commercial substance of the conduct, disregarding what consideration may be given for the benefit. So a transaction on full commercial terms still confers a financial benefit — the question of value goes to the arm's length exception, not to whether a benefit was given at all.

Benefits given indirectly, through interposed entities, are caught.

Who is a related party

The category includes:

• directors of the public company and of any entity that controls it;
• spouses of those directors;
• parents and children of those directors and spouses;
• entities the related party controls;
• entities that control the public company; and
• a person who was a related party in the previous six months, or who believes or has reasonable grounds to believe they will become one.

The approval procedure

Approval is by resolution of the members in general meeting. The procedural requirements are exacting, and failure to comply is itself a contravention:

• The company must lodge the proposed notice of meeting and accompanying documents with ASIC fourteen days before the notice is given.
• The notice must set out the related party, the nature of the benefit, and all information known to the company or its directors that is reasonably required by members to decide whether the proposal is in the company's interests.
• The related party and their associates must not vote on the resolution, subject to narrow exceptions.
• The resolution must be passed as proposed, without material variation.

The disclosure obligation is the heart of the regime. Independent expert reports are commonly obtained for significant transactions, and their omission where the information is material is a frequent source of challenge.

The exceptions

The most important is the arm's length exception in s 210²: approval is not required where the benefit is given on terms that would be reasonable in the circumstances if the parties were dealing at arm's length, or on terms less favourable to the related party.

The test is objective and focuses on the terms, not the process. Evidence of a genuinely independent negotiation helps, but the ultimate question is whether the terms themselves are reasonable. Relying on the exception is a commercial risk, because there is no ruling in advance — the assessment is made afterwards, often with hindsight.

Other exceptions cover:

• reasonable remuneration of an officer or employee, and reimbursement of expenses;
• indemnities, insurance and legal costs for officers within the statutory limits;
• small amounts below the prescribed threshold, aggregated across the related party's group;
• benefits to or from a closely-held subsidiary;
• benefits given to members that do not discriminate unfairly against other members; and
• benefits given under a court order.

Contravention and consequences

The company does not contravene, and the transaction is not invalid. This is a distinctive feature: Chapter 2E does not upset the dealing with third parties.

Instead, a person contravenes if they are involved in the company's contravention — typically the directors who approved the transaction. Contravention attracts civil penalty consequences, and where the involvement was dishonest, criminal liability.

The related-party rules operate alongside, not instead of, the general duties. A transaction that satisfies an exception may still breach the duty of care, the duty to act in good faith in the best interests of the company, or the duty not to improperly use position — and those duties are where a claim will often be framed.

Listing rule overlays

For a listed entity, Chapter 2E is not the whole picture. The ASX Listing Rules impose their own requirements for transactions with related parties and with substantial holders, and they are not co-extensive with the statute — the definitions differ, the thresholds differ, and the Listing Rules require shareholder approval in some cases where Chapter 2E does not.

A listed entity also faces continuous disclosure obligations. A material related-party transaction will usually be price-sensitive information requiring immediate disclosure, independently of whether member approval is needed.

The practical sequence is therefore to test Chapter 2E, then the Listing Rules, then disclosure — three separate questions with three separate answers.

Applying this in a problem question

1. Confirm the company is a public company, or an entity controlled by one.
2. Identify the financial benefit, reading the concept broadly and looking at economic substance.
3. Establish the related-party relationship by reference to a specific limb, including the six-month look-back.
4. Test the exceptions before the approval procedure — if an exception applies, no approval is needed.
5. Where approval was sought, examine the disclosure and the voting exclusions closely.
6. Identify who contravenes, and note that the transaction stands regardless.
7. Address the general directors' duties separately.

Self-check

• Have I confirmed the company is public before applying Chapter 2E?
• Have I read "financial benefit" broadly rather than netting off consideration?
• Have I named the specific related-party limb?
• Have I applied the arm's length test to the terms rather than the process?
• Have I remembered that the company does not contravene and the transaction is not void?