Question

Lindsay is a director and shareholder in Seloc Ltd, a large public company in the retail sector. Recently, the board of Seloc Ltd was considering whether to hire a specialist transport company.
Lindsay told the board that his private company, Wolf Pty Ltd, would like the job. Seloc Ltd’s board agreed and a contract for transport services was signed.
(a) Explain what steps should be taken to ensure that there is no contravention of the Corporations Act.
(b) To what extent would your answer to (a) be different if Seloc were a proprietary company.

Answer 1

Related party means a party that is either:

(i)                 A related party as defined in the applicable financial reporting framework^*; or

(ii)               Where the applicable financial reporting framework establishes minimal or no related party requirements:

a.         A person or other entity that has control or significant influence, directly or indirectly through one or more intermediaries, over the reporting entity;

b.         Another entity over which the reporting entity has control or significant influence, directly or indirectly through one or more intermediaries; or

c.         Another entity that is under common control with the reporting entity through having:  

i.          Common controlling ownership;

ii.         Owners who are close family members; or

iii.        Common key management.

However, entities that are under common control by a state (that is, a national, regional or local government) are not considered related unless they engage in significant transactions or share resources to a significant extent with one another.

Here the company wolf PTY LTD would be a related party for Seloc ltd.

(a)Following Requirements have to be fulfilled:

Member approval needed for related party benefit

Need for member approval

Need for member approval for financial benefit

             (1) For a public company, or an entity that the public company controls, to give a financial benefit to a related party of the public company:

                     (a) the public company or entity must:

                              (i) obtain the approval of the public company’s members in the way set out in sections 217 to 227; and

                             (ii) give the benefit within 15 months after the approval; or

                     (b) the giving of the benefit must fall within an exception set out in sections 210 to 216.

Note 1:       Section 228 defines related party, section 9 defines entity, section 50AA defines control and section 229 affects the meaning of giving a financial benefit.

Note 2:       For the criminal liability of a person dishonestly involved in a contravention of this subsection, see subsection 209(3). Section 79 defines involved.

(2) If:

                     (a) the giving of the benefit is required by a contract; and

                     (b) the making of the contract was approved in accordance with subparagraph (1)(a)(i) as a financial benefit given to the related party; and

                     (c) the contract was made:

                              (i) within 15 months after that approval; or

                             (ii) before that approval, if the contract was conditional on the approval being obtained;

member approval for the giving of the benefit is taken to have been given and the benefit need not be given within the 15 months.

(b) The above provision is applicable to Public Limited Company and thus a proprietary company doesn’t need to follow the above provision before appointing a directors from company with common control.