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Related or Not Related: What You Should Know About Related Party Transactions

Introduction to Related Party Transactions

Related party transactions refer to deals or arrangements between parties who are related by existing business relationship or common interest.

Main Market Listing Requirements of Bursa Malaysia Securities Berhad (“MMLR”) defines related party transaction as a transaction entered into by the listed issuer or its subsidiaries which involves the interest, direct or indirect, of a related party[1].

Evaluation of related party transactions involves critical analysis of the relationship between transacting parties and nature of the transaction as follows:

(i) identify the transacting parties: one of the transacting parties must be a company[2] incorporated under the Companies Act 2016[3];
(ii) whether the transacting parties are related;
(iii) whether the subject matter of the transaction is shares or non-cash assets[4] of requisite value5; and
(iv) whether application of section 228 of the Companies Act 2016 can be excluded pursuant to section 229 of the Companies Act 2016.

As determination of related parties can be time-consuming, we recommend you to determine (iii) and (iv) prior to analysing (ii).

This article presents to you the governing provisions and effect of breaches of related party transactions regulations under the Companies Act 2016.

Please check out our next article on related party transactions regulations under MMLR.

Companies Act 2016

(1) Governing Provisions and Effect of Breach

(2) Who are Related Parties and Connected Persons?



The essence of related party relationship evaluation is that attention must be directed to the substance of the relationship and not merely the legal term.

Phrases like “by whatever name called” and “accustomed or is under an obligation, whether formal or informal, to act”, in the definition of “director” and “person connected” respectively, requires critical analysis of parties’ relationship.

Related party transactions per se, are not banned or illegal. On the positive side, related party transactions can offer contracting efficiency, transaction time and cost benefits in view that the complications and delays that often take place in negotiating contracts can be alleviated between related parties. On the negative side, related party transactions are commonly perceived as red flag in detecting breaches to the arm’s length principle where related party transactions may be engaged under the influence of existing business relationships and the agreed-upon price of the transactions may differ from actual fair market value.

Wealth transfer to related companies via inter-group transactions which deteriorate earnings quality have been widely discussed.[27] Approval requirements and disclosure practices[28] serve as a governing tool to address the risk abusive related party transactions. It has been criticized as erroneous to assume that related party transactions are evidence of defective corporate governance and that stricter regulation of related party transactions consequently equates to good law[29]. What is vital is to ensure that related party transactions, which can present a conflict of interest, are performed in arm’s length and in the best interest of the company.

1 MMLR, paragraph10.02(k)
2 Companies Act 2016, section 2(1): “’company’ means a company incorporated under this Act or under any corresponding previous written law”
3 [Act 777]
4 see footnote no.9 below
5 see footnote no.10 below
6 subject to exceptions set out in section 229 of the Companies Act 2016 (see section 6 of the Companies Act 2016 for definition of “wholly-owned subsidiary”)
7 Companies Act 2016, section 7: “A corporation is deemed to be related to each other if—
(a) it is a holding company of another corporation;
(b) it is a subsidiary of another corporation; or
(c) it is a subsidiary of the holding company of another corporation.”
8 Ibid
9 Companies Act 2016, section 228(9)(c): “’non-cash asset’ means any property or interest in property other than cash.”
10 Companies Act 2016, section 228(8)(b) and (c):
“(b) “requisite value”, in the case of a company where all or any of its shares are quoted on the stock exchange or its subsidiary, shall be the same value as the value prescribed in the listing requirements of the stock exchange where approval of the shareholders at a general meeting is required;
(c) in the case of any company other than a company to which paragraph (b) applies, non-cash asset is of the requisite value if, at the time of the transaction, its value exceeds two hundred and fifty thousand ringgit or if its value does not exceed two hundred and fifty thousand ringgit but exceeds ten per centum of the company’s net asset value provided it is not less than fifty thousand ringgit, where—
(i) the value of the company’s assets is determined by reference to the accounts prepared under section 245 in respect of the last financial year prior to the arrangement or transaction; or
(ii) no accounts have been so prepared and laid before that time, the amount of the company’s called up share capital.”
11 Companies Act 2016, section 228(1)(a)
12 see footnote no.9 above
13 see footnote no.10 above
14 Companies Act 2016, section 228(1)(b)
15 Companies Act 2016, section 228(1)(A)
16 Companies Act 2016, section 228(1)(B)
17 Companies Act 2016, section 228(2)
18 Companies Act 2016, section 228(3)
19 Companies Act 2016, section 228(2)
20 Companies Act 2016, section 2(1) For analysis of “director” under MMLR, check out our next article on related party transactions regulations under MMLR.
21 Companies Act 2016, section 136(2) For analysis of “major shareholder” under MMLR, check out our next article on related party transactions regulations under MMLR.
22 Companies Act 2016, section 136
23 Companies Act 2016 , section 197
24 Companies Act 2016, section 197(2)(a): “a member of the director’s family” means the director’s spouse, parent, child, including adopted child and stepchild, brother, sister and the spouse of the director’s child, brother or sister.”
25 Companies Act 2016, section 197(2)(b): “a body corporate is associated with a director if—
(i) the body corporate is accustomed or is under an obligation, whether formal or informal, or the majority of directors of the body corporate is accustomed, to act in accordance with the directions, instructions or wishes of that director;
(ii) that director has a controlling interest in the body corporate; or
(iii) that director, or persons connected with that director, or that director and persons connected with him, are entitled to exercise, or control the exercise of, not less than twenty per centum of the votes attached to voting shares in the body corporate.”
26 Companies Act 2016, section 228(8)(a)
27 Tong Yan and Wang Huacheng, ‘Related Party Transactions, benefits of control and earnings quality’, Higher Education Press and Springer-Verlag (2008), 187-203
28 check out our next article on related party transactions regulations under MMLR
29 Dan W. Puchniak and Umakanth Varottil, ‘Related Party Transactions in Commonwealth Asia: Complexity Revealed’ (May 2018)


Written by:

Serina Abdul Samad (Co-Deputy Managing Partner)

Kate Lock Kah Yan (