The SRD II addresses conflicts of interests and related party transactions

Written on 12 May 2020

To avoid the risk that the board of directors (or, in some cases, the shareholders' meeting) will make a material decision about or enter into a material transaction with a related party that is only in the interest of one or more controlling shareholders, ignoring the interest of the company itself and its minority shareholders, Article 7:97 BCCA imposes a conflict of interest procedure.

The SRD II and the Law of 28 April 2020 broaden the scope of the current regime and clarify the definition of "related parties".

The transactions covered by this procedure are all material decisions or transactions at the level of the board of directors:

  1. between (a) an issuer or a subsidiary undertaking of an issuer and (b) a "related party".
  2. capital increases by contributions in kind by a controlling shareholder;
  3. (de)mergers or similar transactions involving a controlling shareholder or a subsidiary that is indirectly controlled by the controlling shareholder of the listed company.

Decisions or transactions between the listed company and its subsidiaries, or between two or more subsidiaries, are not subject to the conflict of interest procedure set out in Article 7:97 BCCA, unless the (direct or indirect) controlling shareholder of the issuer holds,directly or indirectly, other than through the issuer itself, 25%or more of the subsidiary or is entitled to share in 25% or more of the profits of the subsidiary.

Decisions or transactions between a non-listed subsidiary of the issuer and a related party must first obtain prior approval from the issuer, except when the related party is the issuer itself or a subsidiary thereof (unless the (direct or indirect) controlling shareholder of the issuer holds (directly or indirectly, other than through the issuer itself) 25% or more of that subsidiary or is entitled to share in 25% or more of the profits of that subsidiary).

Definition of "Related Party" - Article 7:97 BCCA now refers to the International Accounting Standard (IAS) 24 to define "Related Party".[1] Compared to the old definition, the scope of "related party" has been enlarged to also include:

  • Directors and key managers of the listed company or of any parent company, together with all of their close family members and any entities they control or jointly control
  • Group companies (excluding subsidiaries of the listed company, except when they are indirectly controlled through another company by the controlling shareholder of the listed company)
  • Associates (presumption when the associated entity holds 20 per cent or more of the voting rights and otherwise based on factual elements)
  • Joint ventures (based on factual elements)

Procedure largely stays the same. These decisions or transactions must first be assessed by a committee of three independent directors and experts. However, the involvement or not of experts can now be decided by the independent directors at their own initiative (and their own liability risk). Their report is sent to the board of directors, who makes the final decision to approve the decision or transaction (or to submit the proposal to the shareholders' meeting). The auditor issues an opinion on the decision of the board, taking into account the findings of the committee of independent directors.

In addition to the already existing information in the half year report and the annual report, the issuer must disclose the transaction to the public, together with report of the independent directors and the opinion of the auditor as soon as a decision is taken by the board of directors or as soon as the transaction is undertaken. Announcements need to include the name of the related party and the nature of the relationship, the date and value of the transaction, and any other information necessary to assess whether it is fair and reasonable from the perspective of the issuer and of the non-related shareholders (including minority shareholders).

If the related party is a director, this director cannot participate to the deliberations of the board of directors, nor vote on the decision or transaction. If all directors are involved, the decision or transaction is submitted for approval to the shareholders' meeting.

Exemptions – The existing exemptions from the application of the conflict of interest procedure exist for (i) decisions or transactions which are in the ordinary course of business and on normal market terms or (ii) when non-material transactions (below 1% of the net assets) are maintained. As for the first exemption, the law now specifically requires the board to implement an internal procedure to assess on a regular basis whether a transaction or decision falls within the ordinary course of business and is on market terms. In addition, three exemptions are added for decisions or transactions:

  • relating (partly) to the remuneration of directors or other persons in charge of the general and/or daily management of the company,
  • involving credit institutions in the framework of safeguarding their stability or, more generally, the financial stability, if authorised by the supervisory authority, and
  • relating to the acquisition or disposal of own shares, distribution of interim dividends and capital increases in the framework of the authorised capital without restriction or cancellation of the preferential subscription right of the existing shareholders.

Aggregated basis - In order to determine if the conflict of interest procedure applies, a materiality test has to be done whereby the listed company has to take into account all transactions with that specific related party (even transactions that previously did not reach the 1% materiality threshold) over the last 12 months, excluding transactions that occurred in the ordinary course of business.

Entry into force

The provisions of the Law of 28 April 2020 regarding related party transactions will enter into force on 16 May 2020.

 [1] However, this definition is not entirely new, as it is also used in the Royal Decree of 2007 regarding the transparency obligations of listed companies to describe the related party transactions that need to be included in the half year report