2 October 2019 – need2know
Transactions with affiliated companies and persons (hereinafter jointly also referred to as “related parties”) may be disadvantageous to companies and their shareholders, as they may give the related party the opportunity to acquire assets of the company. Consequently, appropriate measures to protect companies and shareholder interests are important. Therefore, based on the 2nd Shareholders’ Rights Directive, a new Sec. 95a of the Austrian Stock Corporation Act (“AktG”) was introduced, which stipulates that transactions concluded with related parties after July 31, 2019, require the approval of the supervisory board when a certain threshold value is reached and also, in accordance with a (further) threshold value, a publication.
2. Previous legal framework
The topic of related party transactions is not new to the Austrian legal system. Although there is no unified regulation, numerous provisions are aiming to avoid conflicts of interest with related parties. The main pillar is the prohibition of the repayment of contributions to related parties in accordance with Sec. 52 AktG. Shareholders are only entitled to the retained profit as shown in the annual balance sheet. Sec. 52 AktG does not only cover the conservation of the share capital of a public limited company but also establishes a comprehensive asset protection, so that any distribution of assets to shareholders and certain related persons/companies is prohibited, unless it is a matter of balance sheet profit or turnover transactions customary for third parties (“at arm’s length”). Further provisions on related party transactions are, in particular, those which breach the management board’s monopoly of representation, such as Sec. 97 (1) AktG, according to which the supervisory board represents the company in legal transactions with the management board or must give its consent in the case of loans to members of the management board. If a member of the supervisory board or a company, in which a member of the supervisory board has a significant economic interest, enters into an agreement with the company to perform services outside the scope of their professional occupation as a member of the supervisory board for more than just an insignificant compensation, the approval of the supervisory board is required. In addition, pursuant to Sec. 238 (1) no. 12 UGB, medium-sized and large companies, regardless of a stock exchange listing, must disclose transactions of the company with related companies and persons if these transactions are substantial and were concluded under non-standard market conditions.
3. Updates for the Supervisory Board
The Austrian legislator has now standardized the following consent requirement of the supervisory board in accordance with the two-body structure (“Organstruktur”) existing in the AktG, which provides for a separation of the management board and supervisory board:
According to Sec. 95a (1) AktG:
- a substantial transaction
- between a listed company and a related party
- requires the approval of the supervisory board
- and, if necessary, the official notice
- unless it is a privileged or exceptional transaction.
Substantial transaction: Sec. 95a AktG does not define the term “transaction”. However, one will have to assume a very broad understanding of the term “transaction”, so that a transaction in the sense of Sec. 95a AktG is to be understood as any transfer of resources, services or obligations between the company and its related party, irrespective of whether a payment is invoiced for this. A transaction is substantial if its value exceeds five per cent of the company’s balance sheet total. For the respective financial year, the balance sheet total from the annual financial statement submitted to the annual general meeting of the previous financial year shall be decisive. In the case of a parent company that is required to prepare consolidated financial statements, the balance sheet total shall be replaced by the sum of the corresponding assets in the consolidated financial statement. If within a financial year, several transactions are concluded with the same related party that would not be substantial if viewed individually, their values shall be cumulated.
Related party: A natural person is considered as a related party if that person or a close member of that person’s family controls or participates in the joint management of the company, has a significant influence over the company or holds a key position in the management of the company. However, legal persons and other legal entities may also be related parties, for instance, if these entities and the listed company belong to the same group or if these entities are controlled by a related party.
Supervisory Board approval: To avoid conflicts of interest, those members who are to be regarded as related parties concerning the transaction may not participate in the vote on the granting of supervisory board approval.
Publication: The management board must publish the transaction by following Sec. 95a (5) AktG if it exceeds ten per cent of the company’s balance sheet total. This must be done via a distribution medium with EU-wide range, such as Thomson Reuters, Bloomberg and Dow Jones Newswire.
Privileged or excluded transactions: Certain transactions will be excluded from approval and publication. Pursuant to Sec. 95a (6) AktG, transactions concluded in the ordinary course of business and at arm’s length prices are not subject to the approval and publication requirements. Both requirements must be met cumulatively.
If organs violate the duties described here, this may constitute a reason for the premature termination of their function as organs (dismissal) and make them liable for damages. Serious violations of the duties of an organ may, if necessary, constitute a breach of trust. Furthermore, the Commercial Register Courts may impose mandatory penalties of up to EUR 3,800 on members of the executive board to enforce compliance with this provision.