Related Party Transactions: What Directors Must Know

A Related Party Transaction (RPT) is a deal between a company and a “related party,” such as a director, major shareholder, or their family members. Under the Companies Act 2016 and Bursa Malaysia Listing Requirements, these must be disclosed and conducted at “arm’s length” to ensure minority shareholders are not disadvantaged by insider favoritism.

In Malaysia, doing business with friends or family isn’t illegal, but it is heavily regulated. Even small recurring arrangements (e.g., renting premises from a director’s relative, appointing a related-party vendor, or paying management fees to a related entity) can be treated as RPTs.The key is showing the terms are commercial and benchmarked (quotes/valuation/market comparisons) and documenting approvals properly.

Managing these transactions is less about avoiding them and more about documenting that the company isn’t being “treated” to a bad deal. 

This guide from a leading accounting service firm summarises the main compliance steps directors should follow for RPTs, under the Companies Act 2016 and (for listed issuers) Bursa Malaysia requirements.

Comparison of RPT Compliance Levels

Note: The percentage-ratio thresholds below are Bursa Malaysia listing requirements (i.e., for listed issuers). Unlisted companies are mainly governed by the Companies Act 2016 approval/disclosure rules.

How the Companies Act 2016 Looks at Related Party Transactions

In simple terms, the Companies Act 2016 is very cautious when directors deal with company assets that involve themselves or people close to them.

The Basic Rule Directors Need To Know

Under Section 228 of the Companies Act 2016, a company cannot deal with non-cash assets of the “requisite value” between:

• The company and a director
• The company and a major shareholder, or
• The company and a person connected to them

The arrangement must be made subject to, or have already received shareholder approval at a general meeting.

What counts as “non-cash assets of the requisite value”?

For unlisted companies

• Asset value exceeds RM250,000, or
• Asset value exceeds 10% of net asset value and is at least RM50,000

For listed companies

• The thresholds follow Bursa Listing Requirements for transactions that require shareholder approval

Why this rule exist: To prevent directors and substantial shareholders from personally benefiting from company assets

What Counts As A “Related” Or “Connected” Person?

The law looks beyond just your name on paper. It also includes people and entities closely linked to you, such as:

• your spouse
• your children or parents
• companies where you hold a meaningful shareholding or control

If you sit on the board, the assumption is that you have influence. Any transaction touching your personal interests is therefore treated as higher risk and must be disclosed properly.

Why Directors Should Take This Seriously

Even if the deal feels commercial or fair:

• The relationship itself triggers scrutiny
• Intent does not remove the obligation to disclose
• Failure to obtain approval can expose directors to regulatory and legal consequences 

“The substance of the relationship matters more than the legal structure. If a person or entity can influence your decisions, they are likely treated as a related party.” – MFRS 124 Related Party Disclosures

What Directors Should Do When a Potential Conflict Arises

When a potential conflict of interest appears, timing matters as much as disclosure.

Directors are expected to declare their interest as soon as they become aware of it, not when the contract is signed. This includes situations where discussions are still informal or exploratory.

Once an interest is identified, good governance practice requires the director to:

• Formally declare the interest to the board
• Ensure the declaration is minuted
• Abstain from deliberation and voting on the matter
• Leave the meeting if requested, especially for material transactions

Remaining silent during discussions or attempting to “manage” the deal from behind the scenes significantly increases personal risk.

Why Directors and Key Management Personnel Are Always Related Parties

For directors and senior executives, related party rules apply even when there is no obvious “deal” on the table.

Under IAS 24 and MFRS 124, Key Management Personnel (KMP) are automatically classified as related parties because they have the authority to plan, direct, and control the company. This typically includes the CEO, CFO, and executive directors.

What many directors miss is that related party transactions are not limited to asset sales or contracts. They also include:

• Salaries and director fees
• Bonuses and performance incentives
• Benefits-in-kind such as company cars, housing, or allowances

For KMPs, disclosure is the default. Financial statements must clearly show:

• Total compensation paid
• The nature of those benefits
• Any outstanding balances owed to or by the company

The objective is transparency. Shareholders and regulators need to see that company value is not being quietly reduced through management perks that escape scrutiny.

Common KMP disclosure categories

When Does a Related Party Transaction Require Shareholder Approval?

Not every related party transaction needs a shareholder vote, but size matters.

For listed companies, transaction significance is measured using percentage ratios, which compare the value of the transaction to the company’s net assets.

Under the rules of Bursa Malaysia, a stepped approach applies:

• Below 0.25% of net assets: typically board approval only
• Between 0.25% and 5%: announcement and additional disclosures may be required
• Above 5%: shareholder approval at an Extraordinary General Meeting (EGM) is mandatory

The related party and their associates are prohibited from voting on the resolution. This ensures the decision is made solely by disinterested shareholders.

Example

A company with RM100 million in net assets proposes to buy a warehouse for RM6 million from a director’s spouse.

• Transaction ratio: 6%
• Required actions:
  • Immediate announcement
  • Shareholder circular
  • EGM approval
  • Director and associates must abstain from voting

Even if the price seems fair, the approval process cannot be skipped.

Why the “Arm’s Length” Principle Is So Important

Disclosure alone is not enough. Related party transactions must also be conducted on arm’s length terms, meaning the deal must be no more favourable than what an independent third party would receive.

In practice, this means the board should be able to demonstrate that:

• Prices are benchmarked against market rates
• Independent quotes or valuations were obtained
• The Audit Committee reviewed and challenged the terms

If a transaction is questioned, the burden of proof sits with the board, not the regulator. Documentation becomes your strongest defence.

Documentation pack directors should expect to see

• Board paper explaining the business rationale and relationship
• Benchmark support (2–3 quotes / independent valuation / comparable market terms)
• Audit committee minutes + recommendation (for listed issuers)
• Abstention record (who declared, who abstained, who left the meeting)
• Draft announcement/circular (if thresholds trigger)
• A simple RPT register (date, counterparty, nature, value, approval route)

This is exactly the sort of “actionable” content that tends to lift indexing/reindexing.

Recent regulatory queries show that vague explanations no longer pass muster. Statements like “the price was mutually agreed” are insufficient. 

Boards are now expected to explain how prices were determined and why they are commercially reasonable.

What Are Recurrent Related Party Transactions (RRPT)?

This section is mainly relevant for listed companies.

Recurrent Related Party Transactions (RRPT) are transactions that occur regularly as part of normal business operations, such as trading between related subsidiaries or service arrangements with related entities.

Requiring shareholder approval for every recurring invoice would be impractical. To address this, companies may seek a Shareholders’ Mandate, which provides blanket approval for specific types of RRPTs.

Points directors should understand:

• The mandate is typically approved at the AGM
• It must be renewed annually
• Transactions must stay within the approved scope and value
• Disclosures are still required, even with a mandate in place

This mechanism balances operational efficiency with ongoing shareholder oversight.

Some intra-group transactions (e.g., between a company and its wholly-owned subsidiaries) may be excluded from RPT treatment under specific listing-rule carve-outs, so classification should be checked case-by-case before assuming an announcement is required.

What Are the Penalties for RPT Non-Compliance?

Failure to properly disclose or manage a Related Party Transaction in Malaysia can expose directors to personal liability, not just corporate consequences.

Directors may face:

• Criminal penalties:
  • Up to 5 years’ imprisonment or
  • Fines of up to RM3 million, or both, for failing to disclose an interest under the Companies Act 2016
• Regulatory sanctions (listed companies):
  • Public reprimands and naming by Bursa Malaysia
  • Monetary penalties and corrective disclosure requirements
  • Possible censure or removal from the board by regulators, including the Securities Commission Malaysia
• Civil liability:
  • Lawsuits by the company or shareholders
  • Court orders to repay profits or compensate losses
  • Claims for breach of fiduciary duty
• Long-term consequences:
  • Disqualification from acting as a director
  • Failed fit-and-proper assessments
  • Reputational damage affecting future board roles

Most penalties arise from late disclosure, missing approvals, or failure to abstain, not from intentionally unfair deals.

A Simple Conflict-of-Interest Self-Check for Directors

Before proceeding with any transaction, directors should ask themselves:

• Would I be comfortable explaining this transaction to shareholders?
• Would this deal look fair if reported on the front page of a newspaper?
• Can the board clearly explain how the price was determined?
• Would the company enter this deal if I were not involved?

If any answer feels uncomfortable, the issue likely requires deeper review or independent advice.

Managing RPTs Without Exposing Directors to Risk

Managing Related Party Transactions is less about avoiding business relationships and more about handling them correctly.

For directors, C-suite leaders, and management teams, the risk rarely lies in the transaction itself. It lies in: 

• Late disclosure
• Unclear approval pathways
• Weak documentation
• Or misunderstanding regulatory thresholds

At Accounting.my, our company secretarial services and corporate advisory help directors and management teams identify potential conflicts early and navigate Companies Act 2016 and Bursa Malaysia requirements with confidence. 

We work alongside boards to ensure RPTs are properly documented, defensible, and aligned with regulatory expectations, so business decisions can move forward without exposing individuals to unnecessary legal or reputational risk.

Disclaimer: This article is for general information only and is not intended to be, and should not be relied upon as, legal, accounting or investment advice. Always consult a qualified professional such as Accounting.my about your specific situation.

Source:

• Companies Act 2016 (Act 777) – provisions on directors’ duties, disclosure of interests, loans to directors and transactions involving non-cash assets of the requisite value (incl. Sections 221, 224, 228 and substantial shareholding rules).
• Bursa Malaysia Main Market Listing Requirements – Chapter 10 and Practice Note 12 on related party transactions, percentage ratios, shareholder approvals, independent advisers, main advisers and recurrent RPT (RRPT) mandates.
• MFRS 124 / IAS 24 – Related Party Disclosures – accounting standard that defines related parties, key management personnel and disclosure requirements for related party transactions and compensation.
• Malaysian Code on Corporate Governance (MCCG 2021) – governance expectations on managing conflicts of interest, oversight by the board and Audit Committee, and disclosure of related party transactions.
• Securities Commission Malaysia & Bursa Malaysia enforcement updates – public enforcement actions and reprimands illustrating how RPT, disclosure and governance breaches are handled in practice.