New related party rules for Main Market issuers

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New rules governing related party transactions for companies listed on the UK’s Main Market came into force on 10 June 2019.

The Financial Conduct Authority (FCA) has published changes to the rules in its Handbook on related party transactions which were needed in order to comply with the revised EU Shareholder Rights Directive. The new rules can be found in the Disclosure Guidance and Transparency Rules (DTRs), specifically DTR 1B.1 and DTR 7.3. Affected companies must publicly announce relevant transactions and, in the case of UK companies, obtain prior independent board approval for them.

The main impact of the changes will be felt by companies with a standard listing on the Main Market which will have to comply with announcement obligations for the first time. However, the changes are significant for premium listed companies as well. Although companies with a premium listing are familiar with the related party transaction requirements contained in Listing Rule 11, they will now have to comply with two sets of similar, but slightly different, related party rules. Companies listed on AIM are not affected.

The new rules require UK companies listed on the main market to:

  • make an announcement regarding the related party transaction via a Regulatory Information Service (RIS) no later than the time when the related party transaction is agreed. The RIS must include any information necessary to assess whether the transaction is fair and reasonable to the company and independent shareholders;
  • obtain board approval for the related party transaction before it is entered into;
  • ensure any director connected with the transaction does not participate in the approval process or vote on the relevant board resolution;
  • establish and maintain adequate procedures, systems and controls to enable an assessment of whether the related party transaction is in the ordinary course of business and on normal market terms; and
  • ensure that the related party is not involved in the above assessment.

The new rules apply to transactions with related parties equal to 5 per cent. or more in size by reference to the issuer’s: (i) assets; (ii) profits; (iii) market capitalisation; or (iv) gross capital. These are similar to the existing class tests for related party transactions with premium listed companies however ‘related party’ has the meaning given to it in international accounting standards (IAS 24) which is wider than the corresponding definition in the Listing Rules. Therefore premium listed companies should bear in mind that the new rules may capture some related party transactions that currently do not need to be announced.

Related party transactions with the same related party (and any of its associates) in any 12 month period must be aggregated and, once the 5 per cent. materiality threshold is reached, both the board approval and disclosure requirements apply to all of the aggregated transactions and not just the one that triggers the rules. This is different to the position under Listing Rule 11 which requires approval and disclosure only of the transaction that triggers the threshold.

WM Comment

The FCA’s new rules apply to financial years beginning on or after 10 June 2019 and so companies within scope will have to comply with the new requirements from the start of the first financial year following 10 June 2019. For example, for companies with a 31 December year end, the rules will need to be complied with from 1 January 2020 onwards.