The SEC's enforcement actions over the past year, including those against Lyft, highlight the importance of comprehensive related party transaction disclosures under Item 404(a) of Regulation S-K. As a follow-up to last week's blog on domestic companies, this week we turn our attention to foreign private issuers (FPIs) and their unique disclosure obligations under Item 7.B of Form 20-F.

Item 404 of Regulation S-K governs the disclosure of related party transactions for domestic companies, but FPIs must comply with Item 7.B of Form 20-F. This rule outlines the necessary disclosures for loans and other transactions between the company and its related entities, shareholders, and key management personnel.

KEY DISCLOSURE REQUIREMENTS UNDER ITEM 7.B

General Disclosure Obligations

Item 7.B of Form 20-F requires FPIs to disclose transactions that involve the company and entities that control or are controlled by the company, as well as individuals or enterprises with significant influence over the company. This includes:

• Entities under common control, such as associates or individuals who directly or indirectly own a substantial portion of the company's voting power.
• Key management personnel, including directors, senior management, and their close family members.
• Enterprises in which key individuals or major shareholders have significant influence.

“Significant influence” typically means the power to participate in, but not fully control, financial and operational decisions. Shareholders with a 10% or greater interest in the company are presumed to have significant influence.

What Needs to Be Disclosed?

For related party transactions that require disclosure, FPIs must include details on:

• The nature, scope, and extent of any material transactions, including unusual transactions involving goods, services, or assets.
• Any loans made by the company or its subsidiaries to related parties, with specifics on the largest amount outstanding, the interest rate, and the terms of the loan.

Interests of Experts and Counsel

Where the Form 20-F requires the naming of experts or counsel, and those individuals or entities hold an economic interest in the company (such as owning shares or being compensated on a contingent basis), those interests must be disclosed. This is particularly relevant in the context of registration statements under the Securities Act.

Exemptions and Special Circumstances

Item 7.B also outlines specific exemptions, particularly for foreign banks. If an FPI, or its subsidiaries, is a foreign bank extending credit under Federal Reserve regulations, certain loans may not require disclosure. The company can claim exemption if the loans are made in the ordinary course of business and on terms comparable to third-party transactions, with no unusual risk of collectability.

Additionally, if privacy laws in the FPI’s home jurisdiction prevent disclosure of the loan recipient’s identity, the company can provide a legal opinion as part of its Form 20-F filing. The opinion must attest that disclosing the recipient’s identity would conflict with those privacy laws.

Time Period for Disclosures

For annual reports filed on Form 20-F, FPIs must disclose related party transactions that occurred from the beginning of the last full fiscal year to the latest practicable date. If filing a registration statement, the disclosure period extends back three financial years.

WHY IT MATTERS: SEC ENFORCEMENT AND COMPLIANCE

The SEC’s focus on related party transactions, as seen in its recent enforcement actions, demonstrates the broad interpretation of disclosure obligations under Item 404 and Item 7.B. The Lyft case serves as a reminder that companies must be vigilant in identifying and disclosing all material transactions with related parties. For FPIs, the stakes are equally high, as the SEC continues to scrutinize foreign issuers and their compliance with disclosure requirements.

Failure to properly disclose related party transactions can result in enforcement actions, financial penalties, and reputational damage. FPIs should work closely with legal counsel to ensure that all necessary information is captured in their Form 20-F filings, especially when dealing with complex international regulations and privacy laws.

CONCLUSION

For FPIs, understanding and complying with related party transaction disclosure obligations under Item 7.B of Form 20-F is essential to maintaining SEC compliance. Companies should thoroughly assess their financial and operational dealings with related parties, ensuring that all material transactions are appropriately disclosed in their filings.

Source: Related Party Transactions for Foreign Private Issuers - Securities Law Blog