The Corporations Act 2001 (Cth) regulates related party transactions by public companies and registered managed investment schemes. The ASX Listing Rules also apply to public companies listed on the Australian Securities Exchange.

Generally, the approval of members must be sought if a public company (or an entity that the public company controls) or a registered managed investment scheme proposes to enter into a transaction:

• that provides a financial benefit; and

• the financial benefit is to a related party.

These rules are designed to protect the interests of a public company's members as a whole, by requiring member approval for giving financial benefits to related parties that could endanger those interests.

See Public companies.

For registered managed investment schemes and listed companies, see Registered managed investment schemes and ASX listing rules.

Related parties are defined by the Corporations Act 2001 (Cth) to include directors, their spouse, children or parents, and other companies under their control.

See Public companies.

A "financial benefit" is to be interpreted broadly; the commercial and economic substance of conduct is to prevail over its legal form and any consideration that is or may be given is to be disregarded, even if that consideration is adequate. Officers of public companies and registered managed investment schemes should be aware that unless a specific exception applies to the transaction, it is likely that a transaction of economic and commercial substance to a related party will fall within the definition of a "financial benefit".

See Public companies.

Member approval is not necessary if the transaction:

• is conducted on an arm's length basis;

• confers a reasonable financial benefit on officers and employees for their remuneration, expenses or liability incurred as officers of the company;

• does not exceed $5,000 in cumulative amount in a financial year;

• confers a financial benefit to a closely-held subsidiary;

• is given to a related party in their capacity as a member and does not unfairly discriminate against members of the company; or

• is given by order of a court.

If there is doubt as to whether an exception applies, having regard to all relevant factors of a transaction, then member approval should be sought.

See Exceptions to the requirement for member approval.

If a related party transaction does not fall within one of the listed exceptions, then the public company must seek the approval of its members.

The process and documents required for obtaining member approval are outlined in div 3 of pt 2E.1 of the Corporations Act 2001 (Cth) are supervised by ASIC.

All documents to be provided to members to enable them to vote on the transaction must first be submitted to ASIC at least 14 days before a notice of meeting is sent to members. ASIC examines the documents with reference to legislation, case law and its own regulatory guides. If ASIC considers the documents to be deficient, it will issue written comments detailing these deficiencies. Copies of ASIC's comments must be provided to members and will be made publicly available on ASIC's register.

The documents provided to members for the purposes of the meeting must in all material respects be the same as the documents lodged with ASIC.

Except in limited circumstances, a related party or its associates must not vote in any capacity on a resolution to give that party a financial benefit. Any votes cast by the related party and its associates must be disregarded.

See Need for member approval.

Failure to obtain member approval will not invalidate a related party transaction, and the public company will not be guilty of an offence. However, penalties may be imposed on any person involved in the contravention of the Corporations Act 2001 (Cth) in relation to related party transactions. Further, if the person's involvement is dishonest, it may constitute a criminal offence.

If a director breaches the related party transaction rules, it is likely they will also be in breach of their fiduciary and legislative duties to the company. If the breach of these duties is serious, ASIC may apply to the Court to disqualify the person from managing corporations.

See Consequences for breach.

Slightly different rules apply to registered managed investment schemes in relation to a related party transaction. The following rules are modified:

• when member approval is required;

• voting at member meetings; and

• the exceptions to obtaining member approval relating to maximum benefits of $5,000 and closely-held subsidiaries are not available to a registered management investment scheme.

See Registered managed investment schemes and ASX Listing Rules.

The Court may declare that the conditions prescribed by the Corporations Act regarding related party transactions have been satisfied if it finds that they have been substantially satisfied.