Consob issues a second consultation paper on the regulation of related party transactions
1. On 9 April 2008 Consob issued a draft regulation on disclosure and fairness requirements for related party transactions performed by Italian listed companies and issuers of shares widely distributed among the public (hereinafter together referred to as issuers).
2. The long consultation process has led Consob to define a new draft regulation which confirms the key principles of the first draft regulation, i.e. the involvement of independent directors and the on-going disclosure of material related party transactions, and introduces some significant new provisions regarding the application of those principles. A new public consultation is therefore open until 30 September 2009.
3. Taking into account the consultation responses, the amendments to the first draft regulation were aimed at:
- building the fairness regulation on a general procedure for related party transactions and narrowing the application of a special procedure and of on-going disclosure to material related party transactions, identified through more selective quantitative criteria;
- better clarifying the role of independent directors in the special procedure, by coordinating their functions with the role of executive directors and with that of the board;
- increasing the flexibility of the regulation, by drawing more procedural options and possibilities of exemption (which in some cases must be envisaged by an ad hoc charter provision), while enhancing the market review on issuers' choices and behaviour;
- enhancing the role of shareholder meetings as an alternative or additional option available to issuers in the approval process of material related party transactions.
4. With regard to the disclosure provisions, material related party transactions have to be promptly (within 5 days) disclosed to the market by issuing a circular describing the transaction, how it was entered into, its impact on the issuer and also the key elements of the independent advisors' opinion. An analytical indication of the material related party transactions concluded in the reference period must be included in the half-year or annual report (according to the Transparency Directive).
5. With regard to the fairness provisions, the general procedure for related party transactions envisages a preliminary non binding opinion by a committee of independent directors, with the possibility of obtaining independent experts' advice. Transactions approved in spite of the negative opinion of independent directors must be periodically (at least quarterly) disclosed to the market.
6. The special procedure for related party transactions was amended in order to clarify the involvement of independent directors at all stages. Consequently, it envisages:
- the participation of independent directors to the negotiation, also pointing out that they must receive adequate information by the executive directors and that they can express their views and personally participate to the negotiation;
- the approval of the relevant transaction by the board of directors with the (binding) favourable opinion of a committee of independent directors, or with other approval mechanisms which ensure that the majority of independent directors plays a determining role.
7. A new provision was introduced in the special procedure in case independent directors give a negative opinion on a material transaction. Companies' procedures may envisage that such a transaction can still be entered into if shareholders approve it. Specific GM approval mechanisms that guarantee that the resolution is not approved by the vote of related parties (whitewash mechanisms) have to be adopted. Whitewash mechanisms are subject to the condition that a minimum threshold of non-related shareholders is present at the GM.
8. Whitewash mechanisms are also envisaged when the decision-making power of a material related party transaction lies with the GM and independent directors have given a negative opinion in the approval by the board of the proposal to be submitted to shareholders (following the general or the special procedure).
9. As in the first draft regulation, smaller companies or recently-listed companies, unless they are controlled by another listed company (pyramidal group), as well as issuers of shares widely distributed among the public, can adopt the general procedure also for material transactions.
10. Transactions in the ordinary course of business and made on terms equivalent to those that prevail in arm's-length transactions can be exempted from the application of procedures and, when relevant, by the disclosure regime. Material related party transactions which are not disclosed to the market through the circular must be notified to Consob within 5 days and also synthetically described in the in the half-year or annual report.
11. The possibility of exempting transactions concluded with subsidiaries, on condition that there are no interests of other related parties in those companies, was confirmed and extended to transactions among subsidiaries and to transactions performed with associates as long as they are in the ordinary course of business and made on terms equivalent to those that prevail in arm's-length transactions.
12. A new possibility of waiver was introduced for transactions to be entered into in cases of urgency. These transactions must be submitted to the advisory vote of the first GM, where shareholders must be provided with a report by the board on the reasons of urgency and with an evaluation by the board of auditors of the existence of these reasons. Results of shareholders' vote, with particular reference to that of non-related shareholders, must be disclosed to the market.
13. New provisions were introduced in order to ensure a clear coordination with banks' legislation regarding transactions with banks' corporate officers (article 136 of the Banking Law) and with the provisions established for companies subject to management and coordination activity of the parent company (articles 2497 ss. of the Italian Civil Code).
14. In light of the organizational and procedural adjustments needed to comply with the proposed regulation transitional provisions set a differentiated timeline for the disclosure and fairness provisions to become effective.
15. Finally, Consob announces its intention to open in the near future a public consultation on the related subject of listed companies' remuneration policy. The objective is to fully and promptly implement the European Commission Recommendations, which focus on the role of the GM and independent directors in the definition of directors' compensation and remuneration policy.
