Related Party Lease at Orion Property Holdings
Orion Property Holdings is an AIM-quoted real estate group. Its CEO's brother-in-law owns a facilities management company, BrightServe. Orion's audit committee approved a three-year lease of office space from BrightServe at £480,000 per year, which is 20% above the independent valuation of £400,000. The lease was signed by the CFO without board approval. The company secretary discovers this during the annual report preparation. The CEO did not declare the relationship at the board meeting where the lease was discussed. AIM Rules require disclosure of related party transactions and the company's articles require board approval for transactions above £250,000. The nominated adviser has not been informed.
1. Identify the breaches and the correct disclosure and approval route.
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Breaches: (1) Related party transaction - the lease with the CEO's brother-in-law is a related party transaction under the AIM Rules for Companies (Rule 13) and must be disclosed; the CEO's failure to declare the relationship is a breach of the conflicts policy and potentially of his fiduciary duty. (2) Board approval - the articles require board approval above £250,000; the CFO signed without it, so the contract may be unauthorised and the CFO may have exceeded authority. (3) Audit committee scope - the audit committee approved a transaction that should have gone to the board, and it did so without the related party disclosure. (4) Price - the 20% premium over valuation raises a question of whether the terms are fair to shareholders. Correct route: the transaction should have been disclosed to the board, the CEO should have recused himself, the independent directors should have approved it after taking independent valuation advice, and the nominated adviser should have been consulted on AIM Rule 13 disclosure. The company secretary should now advise immediate disclosure to the nomad, a board meeting to ratify or terminate the lease, and consideration of whether the annual report must disclose the transaction and the control failure.
2. Recommend the remedial steps and the control changes to prevent recurrence.
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Remedial steps: (1) notify the nomad immediately and take advice on AIM Rule 13 disclosure and any announcement; (2) convene a board meeting with the CEO recused; (3) obtain an independent valuation and renegotiate the lease to market terms or terminate it, with legal advice on the CFO's authority; (4) review the CFO's conduct and consider disciplinary action; (5) disclose the transaction and the control failure in the annual report, with an explanation of remediation. Control changes: (1) a related party register maintained by the company secretary and updated at each board meeting; (2) annual conflicts declarations signed by all directors and senior managers, covering family and close business relationships; (3) a delegated authority matrix with a £250,000 threshold and a requirement for board approval above it; (4) a pre-signature check by the company secretary for any contract with a connected party; (5) training for the CFO and finance team on related party rules. The company secretary should report the changes to the audit committee and track implementation.