Tan Su Wei highlights some of the proposed amendments to the Main Market Listing Requirements.

On 10 January 2014, Bursa Malaysia Securities Berhad (“Bursa”) released a consultation paper for public feedback on the various proposed amendments to the Main Market and ACE Market Listing Requirements (“Consultation Paper”). The period for public consultation closed on 10 March 2014.
 
The proposals contained in the Consultation Paper, if approved and finalised, will provide greater clarity and guidance to the regulatory framework governing listed issuers.
 
In this article, we will highlight some of the significant amendments to the Main Market Listing Requirements (“MMLR”) on related party transactions that were proposed in the Consultation Paper.
 
BACKGROUND
 
The objective of the related party transaction requirements is to ensure that a related party does not abuse its position by entering into transactions to benefit itself or persons connected to it, to the detriment of the listed issuer or its shareholders. In view of this and in the interest of the minority shareholders, Bursa has prescribed a broad definition of who or what constitutes a related party, and what amounts to a related party transaction.
 
A ‘related party’ means, in relation to a corporation, a director, major shareholder (including any person who is or was within the preceding six months of the date on which the terms of the transaction was agreed upon, a director or major shareholder of the listed issuer or of its subsidiary or holding company), or person connected with such director or major shareholder.
 
‘Related party transaction’ is in turn defined as “a transaction entered into by the listed issuer or its subsidiaries which involves the interest, direct or indirect, of a related party”.
 
Bursa recognises that under the existing framework, the broad definition of related party transactions may inadvertently impose a heavy and costly compliance burden on listed issuers where the risk of abuse by a related party is low i.e. transactions where the ‘conflicts of interests’ are theoretical, and may not pose any real risk or harm to the shareholders.
 
MONETARY THRESHOLD
 
The MMLR prescribes monetary and percentage thresholds to exempt transactions which pose insignificant risks to listed issuers and their shareholders from the related party transaction framework and its ensuing requirements.
 
Bearing in mind the effects of inflation on the value of transactions over the years, Bursa proposes to increase the current monetary threshold from RM250,000 to RM500,000. That is, if the value of the transaction is less than RM500,000, the listed issuer will not be required to comply with the related party transaction requirements under the MMLR.
 
THE ROLE OF THE PRINCIPAL ADVISER
 
Presently, a listed issuer is required to appoint an independent adviser if the percentage ratio of a related party transaction is 5% or more. If the percentage ratio of the transaction is 25% or more, a Principal Adviser must be appointed, in addition to an independent adviser.
 
The existing provisions of the MMLR require both the independent adviser and the Principal Adviser to ensure that the transaction is carried out on fair and reasonable terms and conditions and not to the detriment of the minority shareholders. Having reviewed the respective roles and responsibilities of an independent adviser and a Principal Adviser, Bursa proposes to eliminate the overlapping functions of these advisers by entrusting the Principal Adviser with the responsibility of ensuring that a transaction is carried out on an arm’s length basis and on normal commercial terms.
 
It is to be noted that the Consultation Paper does not provide any criteria for determining whether a transaction is being carried out on an ‘arm’s length basis’ and on ‘normal commercial terms’.
 
COMMON DIRECTORSHIP EXEMPTION
 
Paragraph 10.08(11)(c) of the MMLR currently exempts a related party transaction where the only interested relationship in that transaction stems from common directorships held by a related party in the listed issuer or its subsidiaries, and another person (“counterparty”). This is subject to the shareholding interest by the common director in the counterparty being less than 1% other than via the listed issuer.
 
It is proposed in the Consultation Paper to increase this shareholding threshold of less than 1% to less than 5%. This proposal has received positive industry feedback in an informal consultation undertaken by Bursa in November 2013 and is considered by Bursa to be an appropriate enhancement to the current exemption.
 
Furthermore, in view of the fact that the board of directors of a listed issuer has a duty to act in the best interest of the listed issuer, the assumption is that the listed issuer is unlikely to allow a related party holding less than 5% shareholding interest in the counterparty to have influence over the transaction.
 
TARGET COMPANY EXEMPTION
 
Paragraph 10.08(11)(d) of the MMLR exempts an acquisition or disposal by a listed issuer or its subsidiaries from or to an unrelated third party, of an interest in another company (“target company”), where the related party holds less than 5% in the target company.
 
In order to streamline the percentage thresholds under the related party transactions framework, Bursa proposes to increase the related party shareholding threshold in the target company from less than 5% to less than 10%.
 
This proposal ties in with the definition of ‘major shareholder’ under the MMLR and is in line with the requirement of the Hong Kong Stock Exchange.  
 
COUNTERPARTY EXEMPTION
 
The attempt to streamline the shareholding thresholds is also evident in Bursa’s proposed revision of the ‘counterparty exemption’ provisions under the MMLR. Pursuant to Paragraph 10.08(11)(l), a transaction between a listed issuer or its subsidiary and the counterparty where there are no other interested relationships, save for the related party having a shareholding of less than 5% in the counterparty, is currently exempted from the related party transaction requirements in the MMLR.
 
Bursa proposes to increase the shareholding threshold from less than 5% to less than 10% on the premise that it is remote for a person (who is not a common director in the listed issuer or its subsidiaries and the counterparty) holding less than 10% in the counterparty to influence the decision of the counterparty.
 
DISPOSAL OF INTEREST IN INVESTEE COMPANY
 
At present, the disposal of an interest in an investee company where a related party is also a major shareholder or person connected with a major shareholder of the investee company (other than via the listed issuer), is exempted from the related party transaction requirements under Paragraph 10.08(11)(q) of the MMLR, provided that the related party, person connected with the related party or both, are not a party, initiator or agent of the said disposal, and the disposal is effected on Bursa where the counterparty’s identity is unknown to the listed issuer or its subsidiaries at the time of disposal.
 
‘Disposal’ for this purpose includes disposal of an investee company on a pro-rata basis or arising from an acceptance of a take-over offer, except that such disposal need not be effected on Bursa.
 
Without compromising investor protection, Bursa proposes to expand the current exemption to include transactions where the disposal of listed securities in the investee company is not effected on Bursa, but the counterparty is unknown to the listed issuer and is not a related party. An example of such a situation is the disposal by way of a private placement where the placement is carried out by a placement agent through a book-building exercise. The non-related party and hidden identity requirements are put in place to provide adequate safeguards against any potential risk of abuse. 
 
CONTRACTS AWARDED BY PUBLIC TENDER
 
For the purposes of Paragraph 10.08(11)(j), it is proposed that the expression ‘a contract awarded by public tender’ be amended to refer to a contract which is awarded after it has been offered or made available to the public, and not on a selective basis. Bursa also proposes to impose a requirement on the listed awarder or its subsidiaries to provide an explanation of the basis for selecting the winning bid. This additional requirement provides greater transparency to the market and is in line with the requirements of the Singapore Exchange Securities Trading Limited.
 
ADDITIONAL PROPOSED EXEMPTIONS
 
Bursa proposes to introduce, as additional exemptions from related party transaction requirements, the grant of options and the issue of securities under a share issuance scheme for employees and subscription of securities on a pro rata basis, as well as any subsequent equity participation or provision of shareholders’ loans or guarantees to a joint venture established by the listed issuer or its subsidiaries, provided that the subsequent equity participation or provision of shareholders’ loans or guarantees to the joint venture are in proportion to the equity holdings of each joint venture partner.
 
The rationale for these additions is that the risk of potential abuse in these transactions is remote and shareholders’ interests are not prejudiced.
 
CLOSED-END FUND
 
In relation to a closed-end fund, Bursa proposes to extend the definition of a ‘related party’ to include a Manager (i.e. the entity or individual responsible for managing the investments of the fund), custodian, or a director, chief executive, major shareholder of the Manager, or a person connected with such Manager, custodian, or director, chief executive or major shareholder.
 
Furthermore, an interested Manager or interested custodian or interested person connected with the Manager or custodian, having an interest, direct or indirect, will be required under the current proposals to abstain from voting on the resolution to approve the related party transaction.
 
CONCLUSION
 
It is hoped that the proposed amendments in the Consultation Paper in relation to related party transactions will be implemented. Any changes to be made to the MMLR pursuant to the Consultation Paper are likely to take effect from the third quarter of this year.