About a year ago, the SEC brought several enforcement proceedings targeting shortcomings in related party transactions disclosures, including by Lyft. The action provides a reminder that Item 404(a) is broadly construed and reminded me that related party transactions are a topic worthy of blogging about. Last week I published a blog on related party transaction disclosures for domestic companies (see HERE) and this week covers foreign private issuers (FPIs).
Item 404 of Regulation S-K sets forth the related party disclosure obligations for domestic companies that must be included in various periodic reports and registration statements under the Securities Exchange Act of 1934 (“Exchange Act”) and in registration statements under the Securities Act of 1933 (“Securities Act”). Foreign private issuers can comply with Item 404 by providing the information required by Item 7.B of Form 20-F plus any additional information required by its home.
Item 7.B of Form 20-F
General Disclosure
Item 7.B of Form 20-F requires certain disclosure related to loans between the company and (i) entities that are directly or indirectly control, are controlled by or are under common control with the company; (ii) associates (unconsolidated enterprise in which the company has a significant influence over or which has a significant influence over the company); (iii) individuals owning, directly or indirectly, an interest in the voting power of the company that gives them significant influence over the company, and close family members of such individuals; (iv) key management personnel, including those persons having authority and responsibility for planning, directing and controlling activities of the company, including directors, senior management and close family members; or (v) enterprises in which a substantial interest in the voting power is owned directly or indirectly by any person described in (iii) or (iv) or over which such a person is able to exercise significant influence. Item 7.B continues to clarify that these related persons would include enterprises owned by directors or major shareholders of the company and enterprises that have a member of key management in common.
“Significant influence” is the power to participate in the financial and operating policy decisions but is less than control over those policies. Shareholders beneficially owning a 10% or greater interest in the voting power of a company are presumed to have a significant influence on the company.
Where a related party transaction requires disclosure, the following information must be disclosed:
- The nature and extent of transactions or presently proposed transactions which are material to the company or the related party, or any transactions that are unusual in their nature or conditions, involving goods, services, or tangible or intangible assets, to which the company or any of its parents or subsidiaries were a party; and
- The amount of outstanding loans (including guarantees of any kind) made by the company, its parent or subsidiaries, to or for the benefit of any of the delineated related persons set forth above. The information should include the largest amount outstanding during the covered period, the amount outstanding as of the latest practicable date, the nature of the loan and the transaction in which it was incurred, and the interest rate on the loan. In addition, if the company, its parent or any subsidiaries is a foreign bank that has made loans where disclosure is not required (see exemptions below), identify the director, senior management member, or other related party who received the loan, and the nature of the loan and recipient’s relationship to the foreign bank.
Interests of Experts and Counsel
If any experts or counsel that are named in the document requiring Item 7.B disclosure were employed on a contingent basis, own shares in the company or subsidiaries which is material to that person or had a direct or indirect economic interest in the company or the success of the offering, disclosure of the nature and terms of such contingency or interest must be provided.
Interests of experts or counsel need only be provided where the Item 7.B disclosure is included in a Securities Act registration statement, and not where it is included in a Form 20-F filed under the Exchange Act.
Time Period for Required Disclosure
If the Form 20-F is being filed as an Exchange Act registration statement, disclosure must be for the period since the beginning of the company’s three financial years up to the date of filing the Form 20-F. If the Form 20-F is being filed as an annual report, disclosure must be made for the period from the beginning of the last full fiscal year up to the latest practicable date.
Disclosure Exclusions
If the company, its parent or any subsidiaries is a foreign bank, saving and loan association or broker dealer extending credit under Federal Reserve Regulation T, and the loans are not disclosed as past due, nonaccrual or troubled debt restructurings in the company’s financial statements, the company may disclose (if true) that the loans: (i) were made in the ordinary course of business; (ii) were made on substantially the same terms, including interest rate and collateral, as those prevailing for comparable third parties loans at the time (third parties must be true unrelated third parties); and (iii) the loans did not involve more than the normal risk of collectability or have other unfavorable features.
If the company, its parent or any subsidiaries is a foreign bank, and such bank cannot identify the recipient of a disclosable loan because such disclosure would conflict with privacy laws, such as customer confidentiality or data privacy, of the company’s home jurisdiction, then the company must provide a legal opinion attesting to same. The legal opinion must be included as an exhibit to the Form 20-F. In addition, general disclosure must be made that: (i) an unnamed director, senior management, or other related party for which disclosure would otherwise be required, has been the recipient of a loan; (ii) home country privacy laws prevent the disclosure of the name of this loan recipient; and (iii) the loan recipient is unable to waive or has otherwise not waived application of the privacy laws.
Item 7.B disclosure is not required where the transaction involves the recovery of erroneously awarded compensation (see HERE for more on the clawback rules).
The Author
Laura Anthony, Esq.
Founding Partner
Anthony, Linder & Cacomanolis
A Corporate and Securities Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony, Linder & Cacomanolis, PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALC legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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