A FTSE250 Company Secretary writes...
Listing Principle 1 requires a listed company to maintain internal procedures, systems and controls which ensure the timely identification of related party transactions. Practical law states that a related party transaction policy is key to compliance.
Please can you share your processes and controls in place for identifying related party transaction obligations and ensuring timely disclosure?
(As usual, I would be happy to act as ‘post box’ for this query, should you have written processes you are willing to share – but not post openly. Please send a copy to me at: dm@equitycomms.com and I will forward. Thank you. David Mensley)
I agree that a written policy – and underlying written procedures – are key to compliance in what can be a very complex area. The definition of related parties alone is opaque and made more complex by the fact that the definition for IFRS24 and the DTR is different from that in the listing rules and that in the Companies Act.
The first step is to identify who your known related parties are and where in the organisation proposed transactions with them might first come to notice before they are entered into.
As well as a policy, we have maintained a known related parties register and a related parties transaction register. Both are updated biannually and circulated for confirmation to those persons in the organisation most likely to see the proposed transactions in their planning stages. That includes Legal, members of the procurement committee, heads of the operating units, the CEO, CFO and COO. Obviously that group needs to be tailored to your organisational structure. Annually both registers are reviewed and confirmed by the board, which includes a representative of the major shareholder. CoSec maintain the known related parties register, cross-checking it against the board’s conflicts register and the group structure and reviewing it with (in our case) our major shareholder biannually to ensure that it continues to reflect their group. Finance keep the transactions register, though Legal could equally do it (and have done in other companies I have worked in).
Any proposed related party transaction requires review and approval by the audit committee on behalf of the board.
One of the other tricky aspects is determining whether a transaction is ordinary course. (The business tends to maintain all are ordinary course, in my experience!) In my last company we recorded all transactions on the register and noted on it which were ordinary course. At my current company we have only recorded non-ordinary course ones as there are so many.
It is something of a minefield, particularly if you have one or more large shareholders) and an area where I have found that a lot of internal conversations and training is required, particularly for those not familiar with UK listed entities or IFRS requirements. Expect a lot of eye-rolling!