The OSC has issued OSC Staff Notice 51-723 Report on Staff’s Review of Related Party Transaction Disclosure and Guidance on Best Practices.
Here’s the high-level summary from the news release:
- “A Related Party Transaction (RPT) is a normal feature of business, and occurs between an issuer and a related party of the issuer at the time the transaction. In Canada, there are disclosure requirements relating to RPTs to ensure the fair treatment of all security holders. Almost all of the issuers in the review had some form of RPT disclosed in their financial statements or their Management’s Discussion and Analysis (MD&A).
- In conducting the review, OSC staff assessed the RPT disclosure of 100 Ontario-based issuers selected at random across all industries. Nearly half of the issuers reviewed received comments from staff requesting prospective changes to the MD&A in order to improve clarity. In addition 20% of the issuers referred to having a code of conduct but the code was not accessible to investors. At staff’s request the code was filed on the System for Electronic Document Analysis and Retrieval (SEDAR).
- ‘Investors are entitled to clear and meaningful disclosure of RPTs to help inform their investment decisions,’ said Huston Loke, Director of Corporate Finance. ‘The disclosure should highlight the purpose of the RPT, the parties involved and the corporate governance practices surrounding the approval of RPTs. We encourage issuers and their advisers to refer to our guidance as they prepare their annual and interim filings.’”
The report doesn’t identify much of a problem with the disclosure in the financial statements though:
- “We found disclosure of related party information in financial statements generally complied with IFRS requirements. The most common omission related to the disclosure in accordance with paragraph 13 of IAS 24 of relationships between a parent and its subsidiaries. IAS 24 explains that such disclosure enables users of financial statements to form a view about the effects of related party relationships on the entity and should be disclosed irrespective of whether there have been transactions between the parties. Nine issuers agreed to prospectively include this disclosure.
- In some circumstances, we found issuers disclosed only the existence of RPTs and outstanding amounts payable to, or receivable from, related parties, without providing further description of the nature and terms of the transactions. More descriptive disclosure provides transparency and clarity, which allows investors to better assess the merits of the transactions, especially when the transactions are material or not in the normal course. As a result of our review, four issuers were asked to prospectively provide more descriptive disclosure in their next set of financial statements.”
As I’ve written before however, I think it’s highly debatable how often these disclosures, no matter how detailed they are, really allow investors to better assess the merits of the transactions. The great majority of the disclosures relate to transactions such as payments to law firms or other organizations in which a director or a member of senior management is a partner or officer. Of course, it’s entirely true that the related party aspect of these arrangements may have affected profit or loss, by imposing or facilitating a pricing structure different from what would likely have been negotiated with non-related parties. But since the financial statements provide no basis for even vaguely speculating on whether that actually was the case, or on whether it worked to the issuer’s favour or detriment, it’s impossible to see what users can generally do with the information other than shrug and move on. Likewise, I defy anyone to rationally explain how merely providing the names of all an issuer’s subsidiaries allows users “to form a view about the effects of related party relationships” on the issuer, or what the nature and value of that “view” might actually be.
And by the way, isn’t that reference to “especially when the transactions are material” rather strange, given that, if they’re not material, it should be unproblematic if they’re not disclosed at all. I know there’s a common view that related party transactions are particularly sensitive and subject to different materiality assessments and, of course, an amount that means very little in the grand scheme of an issuer’s operations might be much more troubling if it were improperly channeled into the pockets of a related party. But if the object of the disclosures were to counter such concerns, they should meticulously describe for each item what steps were taken to ensure they represent fair value (perhaps extending the regime set out by Canadian securities regulators in Multilateral Instrument 61-101 – also addressed in the notice – for transactions involving greater than 25% of an issuer’s market capitalization). Since that’s not the case, it’s hard to see why related party transactions wouldn’t be assessed against the same materiality criteria as everything else…which should probably mean that a lot of what’s currently disclosed could simply be eliminated.
But anyway, largely pointless as this particular disclosure game may be, it seems from the low-key findings set out in the notice that most issuers have figured out well enough how to play it…
The opinions expressed are solely those of the author