To promote good corporate governance and the protection of minority investors, the Securities and Exchange Commission (SEC), pursuant to its regulatory power under Section 179(d) of the Revised Corp. Code of the Philippines (Republic Act 11232) issued the Rules on Material Related Party Transactions (RPT) for publicly listed companies (PLCs) (Memorandum Circular 19) dated April 25, 2019, and published on April 27, 2019.
The Rules on Material Related Party Transactions recognize that transactions between and among related parties may create financial, commercial and economic benefits to individual institutions and to the entire group where said institutions belong. In this regard, related party transactions are generally allowed provided, that when RPTs amount to 10 percent or higher of a company’s total assets, it shall be considered as material related party transactions subject to these Rules. Compliance to these Rules shall be mandatory for all PLC.
Disclosure/Reportorial Requirements
1. All existing PLCs shall be required to submit to the SEC a policy on Material RPT in accordance with these Rules within six months from the effectivity of the Material RPT Rules. Companies listed after the effectivity of these Rules shall be required to submit their Material RPT Policy in accordance with these Rules within six months from listing date. The policy shall be signed by the company’s chairman of the Board and compliance officer.
2. The Material RPT Policy with accessible link shall be posted on the company’s web site within five days from submission to the SEC.
3. The Advisement Report on Material RPTs (Annex A of the Rules) shall be filed within three calendar days after the execution date of the transaction. The Advisement Report shall be signed by the reporting Plc.’s corporate secretary or authorized representative.
4. A summary of Material RPTs entered into during the reporting year shall be disclosed in the company’s Integrated Annual Corporate Governance Report (I-ACGR) submitted annually every May 30.
Imposable penalties
a. For Non/late filing of, or incomplete/incorrect signature in, the Material RPT Policy, the imposable penalties are a basic penalty of P10,000 and monthly penalty of P1,000, which will continue to accrue until the Material RPT Policy is submitted to the SEC.
b. Non/Late filing of Incomplete/Incorrect Advisement Report includes a penalty of Reprimand, Basic Penalty of P30,000 to P40,000 and Daily Penalty of P200 to P400, without prejudice to administrative penalties that may be imposed by the SEC.
Abusive Material Related Party Transactions
An interested director or officer of a corporation shall be disqualified from being a director, trustee or officer of any other corporation on the basis of a final judgment rendered by a court of competent jurisdiction against the interested director or officer for abusive Material RPTs. The disqualification shall be for a period of at least one year or more, as may be determined by the Commission. Abusive Material RPTs refer to the Material RPTs that are not entered at arm’s length and unduly favor a related party.
At a minimum, Material RPT policies shall include, but not be limited to the following:
a) Identification of related parties. The policy shall clearly identify persons and companies that are considered as the company’s related parties.
b) Coverage of Material RPT policy. The Material RPT policy shall cover all transactions meeting the materiality threshold.
c) Adjusted thresholds. The company shall be allowed to set a threshold lower than the materiality threshold provided under these Rules upon determination by the board of directors of the risk of the RPT to cause damage to the company and its shareholders. The adjusted threshold, when applicable, shall be contained in the company’s material RPT policy.
d) Identification and prevention or management of potential
or actual conflicts of interest, which may arise out of or in connection with
material RPTs. The policy shall cover the identification and prevention or
management of potential or actual conflicts of interest which may arise out of
or in connection with the material RPTs. Directors and officers with personal
interest in the transaction shall fully and timely disclose any and all
material facts,
including their respective interests in the material RPT and abstain from the
discussion, approval and management of such transaction or matter affecting the
company. In case they refuse to abstain, their attendance shall not be counted
for purposes of assessing the quorum and their votes shall not be counted for
purposes of determining majority approval.
e) Guidelines in ensuring arm’s length terms. The policy shall have clear guidelines in ensuring that no preferential treatment shall be given to related parties that are not extended to non-related parties under similar circumstances.
f) Approval of material RPTs. All individual material RPTs shall be approved by at least two-thirds vote of the board of directors, with at least a majority of the independent directors voting to approve the material RPT. In case that a majority of the independent directors’ vote is not secured, the material RPT may be ratified by the vote of the stockholders representing at least two-thirds of the outstanding capital stock.
g) Self-assessment and periodic review of policy. The internal audit shall conduct a periodic review of the effectiveness of the company’s system and internal controls governing material RPTs. The company’s compliance officer shall ensure that the company complies with relevant rules and regulations.
h) Disclosure requirement of material RPTs. The members of the board, substantial shareholders, and officers shall fully disclose to the board of directors all material facts related to material RPTs, as well as their direct and indirect financial interest in any transaction or matter that may affect or is affecting the company. Such disclosure shall be made at the board meeting where the material RPT will be presented for approval and before the completion or execution of the material RPT.
i) Whistle-blowing mechanisms. The policy shall include effective whistle-blowing mechanisms consistent with the corporate values and Codes of Conduct set by the board of directors.
j) Remedies for abusive material RPTs. The policy shall include measures that would cut losses and allow recovery of losses or opportunity costs incurred by the company arising out of or in connection with abusive material RPTs.
It is hoped that this circular will be honored more in its observance than in its breach!