What should such a report contain? What are the most common mistakes? And what changes will the recodification of private law, which should be effective from 2014, bring?
First let’s have a look at what the report on relations should contain. In the introduction to the report, the statutory body should describe which companies the report pertains to. This means that the statutory body shall specify shareholders of a joint stock company or the participants of a limited liability, as well as other controlled companies known to the statutory body, acting with due managerial care.
The first part of the report should contain a summary of contracts and amendments to the contracts concluded in 2012 between related persons with commentary as to whether full consideration (of price customarily agreed in ordinary course of business, on usual commercial terms and with usual payment periods) was provided for performance each time. The commentary should also include information, as to whether any damage was incurred by the company based on agreements concluded between the related persons.
The second part of the report should include a summary of sales and purchases, which were made in 2012 and which arise from all relationships between related persons. Please note that this applies to all existing contractual relationships (i. e. not only to contracts concluded in 2012). In the second part, the report should also refer to the appendix of the relevant financial statements since the report should include information on assets and liabilities arising from the contractual relationships and from other transactions between the relevant parties.
If other legal acts have been undertaken in the relevant accounting period in the interest of related persons or if other measures have been taken in the interest or at the initiative of such persons, it is necessary to include information in respect of such matters as well (with advantages and disadvantages thereof). If any damage resulting from such acts or measures has been incurred by the company, the company shall state, whether such damage has been reimbursed in the accounting period or whether an agreement on such reimbursement has been concluded.
Common mistakes
The most common mistake in preparing reports on relations is a discrepancy between the financial statement and the report. For example, certain companies describe transactions with other companies within a company group (including amount of performance), but they don’t include certain information in the report on the grounds that it is a “business secret”. However, both the report on relations and financial statement are disclosed in the Collection of Documents as the part of the annual report for previous year. From the case law relating to the expert examination of the report (if such examination should be upon request of the participants carried out) it follows that the expert shall examine whether the report is correct, true and complete. The Board of Directors shall provide such expert with all information, even if such information is considered to be business secret.
The report on relations after the recodification
In contrast to the current situation, the Corporations Act, which should come into force in 2014, lists in more detail and more extensively what the report should contain. The introduction should include a description of relationships between the related persons, purpose of the controlled person and a description of the means of controlling. The statutory body of the relevant company will be obliged to include in the report also a summary of acts made in the last accounting period, which resulted in damage and which were made at the initiative of or in the interest of any related person, and also important facts relevant for assessment of such damage and the reimbursement of the same. As a new and important rule the new Act state that if the statutory body does not have information necessary for preparation of the report, the statutory body will have to state this in the report together with an explanation.
The report on relations will also have to evaluate advantages and disadvantages arising from the relationships between the related persons. There will also be a new obligation to describe the possible risks arising from such relationships for the controlled persons and to state whether advantages or disadvantages prevail.