The Securities and Exchange Commission (“SEC”) has issued Memorandum Circular No. 10, Series of 2019, promulgating the Rules on Material Related Party Transactions for Publicly-Listed Companies (the “Rules”) which became effective on 27 April 2019.
The SEC recognizes that the financial, commercial and economic benefits of transactions between/among related parties. Thus, related party transactions (“RPT”) are generally allowed. However, when the RPT is material, the same will be subject to the Rules.
A material RPT refers to a transfer of resources, services or obligations between a publicly-listed company and a related party, either individually or over in aggregate a 12-month period with the same related party, amounting to at least 10% of the listed company’s total assets based on its latest audited financial statement and regardless of whether a price was actually charged. It includes not only transactions that are entered into with related parties, but also outstanding transactions that are entered into with an unrelated party that subsequently becomes a related party.
Related parties include a listed company’s directors, officers, substantial shareholders (i.e., any person who is directly or indirectly the beneficial owner of more than 10% of any class of the listed company’s equity security), and their spouses or relatives within the fourth civil degree of consanguinity or affinity, whether legitimate or common-law, if these persons have control, joint control or significant influence over the listed company. It also covers the listed company’s parent, subsidiary, fellow subsidiary, affiliate joint venture or an entity that is controlled, jointly controlled or significantly influenced or managed by a person who is a related party.
The Rules require listed companies to adopt a group-wide material RPT policy (“RPT Policy”) which shall include the following at the minimum: identification of related parties; coverage of material RPT Policy; adjusted thresholds; identification and prevention or management of potential or actual conflicts of interest which may arise out of or in connection with material RPTs; guidelines in ensuring arm’s length terms; approval of material RPTs; self-assessment and periodic review of RPT Policy; disclosure requirement of material RPTs; whistle-blowing mechanisms; and remedies for abusive material RPTs.
The RPT Policy must be submitted to the SEC within 6 months from the effectivity of the Rules. The RPT Policy must also be posted on the listed company’s website within 5 days from its submission to the SEC.
The Rules also impose additional reportorial or disclosure requirements to listed companies. A listed company is required to file with the SEC an Advisement Report within 3 calendar days from the execution of a material RPT.
The PLC shall disclose all the material RPTs it entered into during the reporting year by including a summary of the same in its Integrated Annual Corporate Governance Report, which is filed on or before 30 May of each year with the SEC.
Imposable Penalties
1. Non-filing or late filing or the incomplete/incorrect signature in the RPT Policy will entail the following penalties:
| Basic Penalty | PhP10,000.00 |
| Monthly Penalty | PhP1,000.00 |
The monthly penalty will continue to accrue until the RPT Policy is submitted to the SEC.
2. Non-filing or late filing or the incomplete/incorrect Advisement Report will entail the following penalties:
| Violation | First Offense | Second Offense | Second Offense | Third Offense | Third Offense |
| Basic Penalty | Daily Penalty | Basic Penalty | Daily Penalty | ||
| Non/Late Filing of Advisement Report | Reprimand | PhP30,000.00 | PhP200.00 | PhP40,000.00 | PhP400.00 |
| Incomplete/ Incorrect Advisement Report | Reprimand | PhP10,000.00 | PhP200.00 | PhP20,000.00 | PhP400.00 |
Continued non-payment of the assessed fine and/or failure to comply with the requirement within a period of 15 days after notice and hearing, shall be a sufficient ground for the SEC to take other appropriate action or remedies available under Section 158 of the Revised Corporation Code of the Philippines.
Further, the commission of a fourth offense for the same violation is a ground for the suspension/revocation of the erring company’s registration or secondary license, after due notice and hearing.
3. Abusive Material RPTs – pursuant to Sections 26 and 27 of the Revised Corporation Code, 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 1 year, as may be determined by the SEC.