Material related party transactions are subject to approval and disclosure
On 10 June 2019 the rules in the Danish Companies Act on approval and disclosure of transactions between a listed company and its related parties came into effect. The rules intend to ensure sufficient transparency for shareholders of listed companies, and that transactions with related parties are concluded on normal market terms.
The rules require, among other things; the board of directors' prior approval of material related party transactions, as well as an introduction of an internal procedure to assess whether a transaction is material and therefore subject to the board of directors' approval. In addition, material transactions exceeding a certain amount must be disclosed when entered into with related parties.
Which transactions need approval?
Pursuant to section 139d of the Danish Companies Act, a material transaction
between the company and its related parties must be approved by the board of directors before the completion of the transaction. The assessment of materiality is specific and is not further defined in the regulation, however, according to the preparatory work of the Danish Companies Act, the assessment is based on the applicable accounting standards. Accordingly, the board of directors must make the materiality assessment in accordance with the general rules on materiality assessment that are used in connection with the preparation of the company's financial statements. Furthermore, the board of directors must introduce a procedure for periodic assessments of related party transactions.
Who is a related party?
Related parties are defined in the same manner as in the International Accounting Standard 24. The definition must be adapted to the company's own definition hereof. This means that the company must apply the definition of related parties used in connection with the preparation of the financial statement. In general, related parties include:
(i) members of the board of directors or the executive board, and other key members of the company's management as well as close family members of such persons;
ii) legal entities over which persons covered by (i) exercise control or significant influence;
(iii) the company's consolidated and associated companies, provided that persons covered by (i) exercise control or significant influence over such companies.
Which transactions must be disclosed?
Not all transactions that are subject to the board of directors' approval must be disclosed. A related party transaction must be disclosed as soon as possible if the fair value of the transaction is:
- 10 % or more of the company's total assets; or
- 25 % or more of the operating income to the most recently published consolidated financial statement.
If the company does not prepare a consolidated financial statement, the calculation must be made on the basis of the most recently published financial statement. If more transactions have been concluded between the company and the same related party within the same financial year, announcement shall be made when the sum of the un-announced transactions exceeds one of the thresholds.
Disclosure must be made without delay after the parties have entered into a binding agreement; hence, disclosure cannot be delayed until the date of carrying out the agreement. The preparatory work of the Danish Companies Act does not further describe what is meant by "without delay". Generally, it implies that disclosure must take place on the date of entering into the agreement.
Disclosure must be made on the company's website and must remain public available for five years. Accordingly, there is no requirement to make a company announcement. It deserves notice that Nasdaq Copenhagen in its issuer rules of 1 July 2019, has deleted the obligation to disclose related party transactions, as this is now regulated in the Danish Companies Act.
How to implement the new rules in practice
It is our recommendation that the new disclosure requirements are implemented in the company's internal rules to ensure compliance with the company's disclosure obligation. Further, we recommend that the internal procedure for periodic assessments of related party transactions is implemented in the rules of procedure and the annual cycle of work for the board of directors. At present, there are no formal requirements for the structure of such internal procedure, and the term periodic is not further specified.
Therefore, it is our recommendation that the internal procedure adapts to the activities of the relevant company, and that the periodic assessments are an item on the agenda of the meeting of the board of directors for instance, such as once a year. It is also relevant to ensure that senior managers (who in this respect are considered related parties) are informed of the obligation to obtain prior approval before entering into transactions with the company.
Please do not hesitate to contact us if you need specific advice on how to ensure compliance with the new requirements.