Connected Person

Definition

A Connected Person in the context of the Companies Act refers to individuals or entities that have a specified relationship with a director, which necessitates certain disclosure requirements. This includes:

Spouse: The director’s legally married partner.
Child or Stepchild: Biological or legally adopted children under the age of 18.
Body Corporate: A corporation in which the director holds a significant interest or association.
Trustee: An individual or entity serving as a trustee for a trust that benefits the director or another connected person.
Partner: A business partner or co-owner in a partnership with the director.

These connections are particularly pertinent in ensuring transparency and avoiding conflicts of interest in corporate governance.

Examples

Spouse and Family: If a company director’s spouse holds shares in the same company, this must be disclosed to prevent conflicts of interest.
Corporate Associations: If a director is affiliated with a subsidiary or sister company as a major stakeholder, disclosure of this relationship is required.
Trusteeships: When a director is a beneficiary of a family trust managed by a third party, transparency must be maintained in relation to the director’s business dealings.
Partnerships: A director’s business partnership that operates in a related field must be disclosed to prevent any undue influence or fiduciary confusion.

Frequently Asked Questions (FAQs)

Q1: Why are connected persons required to be disclosed? A1: Disclosing connected persons helps maintain transparency, reduce potential conflicts of interest, and uphold corporate governance standards.

Q2: What happens if a director fails to disclose a connected person? A2: Failure to disclose associated individuals or entities can lead to legal and financial repercussions, including hefty fines and reputational damage.

Q3: Are adult children considered connected persons? A3: Only children or stepchildren under the age of 18 are categorized as connected persons in this context.

Q4: How is a ‘significant interest’ in a body corporate defined? A4: This can vary by jurisdiction, but typically a significant interest refers to owning a substantial number of shares or having notable influence or control within the corporation.

Q5: Is there a required format for these disclosures? A5: Specific reporting formats are often mandated by corporate regulatory bodies, requiring detailed descriptions and declarations.

Corporate Governance: The system of rules, practices, and processes by which a company is directed and controlled.
Conflict of Interest: A situation in which a person is in a position to derive personal benefit from actions or decisions made in their official capacity.
Fiduciary Duty: A legal obligation to act in another party’s best interest.
Beneficial Ownership: The right to receive benefits on shares within a company even though the shares are in another name.
Transparency: Operating in such a way that it is easy for others to see what actions are being performed.

Online References

Suggested Books for Further Studies

“Corporate Governance: Principles, Policies, and Practices” by Bob Tricker
- Offers comprehensive insights into corporate governance and related disclosure requirements.
“Boards That Lead” by Ram Charan, Dennis Carey, and Michael Useem
- Focuses on the roles and responsibilities of corporate boards, including the importance of transparency.
“Corporate Governance and Ethics” by Zabihollah Rezaee
- Addresses the ethical implications of corporate governance practices.
“The Modern Firm: Organizational Design for Performance and Growth” by John Roberts
- Discusses organizational structures and the importance of effective governance and compliance.
“The Extra Mile: How to Engage Your People to Win” by David MacLeod and Chris Brady
- Looks at broader aspects of leadership and stakeholder engagement.

Accounting Basics: “Connected Person” Fundamentals Quiz

### What is considered a connected person in relation to a company director? - [x] A director's spouse - [x] A director's minor child or stepchild - [x] A body corporate associated with the director - [ ] An unrelated business associate who is not a partner > **Explanation:** Connected persons typically include a director's spouse, minor children or stepchildren, and bodies corporate with which the director is associated. ### Why do connected persons need to be disclosed? - [x] To maintain transparency - [x] To reduce potential conflicts of interest - [ ] To enhance market competition - [ ] To lower tax liabilities > **Explanation:** Disclosures are required to maintain transparency and reduce potential conflicts of interest in corporate governance. ### Do directors need to disclose connected persons if there is no apparent conflict of interest? - [x] Yes, as a matter of compliance - [ ] No, only if a conflict arises - [ ] Only at the initiative of the board - [ ] When there is a legal directive > **Explanation:** Disclosures are mandated as part of compliance to avoid any potential conflicts before they arise. ### At what age does a child cease to be considered a connected person? - [ ] 16 - [x] 18 - [ ] 21 - [ ] 25 > **Explanation:** Children or stepchildren under the age of 18 are considered connected persons for the purposes of disclosure. ### Should a director disclose shareholdings of their spouse? - [x] Yes, it must be disclosed - [ ] No, only the director's shareholdings need disclosure - [ ] Only if the shares are in significant volume - [ ] Only during specific transactions > **Explanation:** Shareholdings of the spouse must be disclosed to prevent possible conflicts of interest. ### In the case of a trust, who needs to be disclosed? - [ ] Only the trust’s beneficiaries - [x] The trustee, if the trust benefits the director or a connected person - [ ] Only the director - [ ] The financial adviser of the trust > **Explanation:** The trustee needs to be disclosed if the trust benefits the director or another connected person. ### What is one key reason for disclosing business partners as connected persons? - [x] To prevent conflicts of interest - [ ] To increase corporate taxation - [ ] For industry market analysis - [ ] For enhancing internal policies > **Explanation:** Disclosing business partners helps prevent potential conflicts of interest. ### Does holding significant interest in a subsidiary require disclosure? - [x] Yes, it must be disclosed - [ ] No, subsidiaries function independently - [ ] Depending on the nature of the business - [ ] Only if stipulated by the board > **Explanation:** Significant interest in a subsidiary must be disclosed as part of transparency efforts. ### Which term relates to a legal obligation to act in another's best interest? - [x] Fiduciary Duty - [ ] Corporate Governance - [ ] Beneficial Ownership - [ ] Trust Management > **Explanation:** Fiduciary duty entails a legal responsibility to act in the best interest of another party. ### What is the primary benefit of transparency in corporate governance? - [ ] Increased financial gains - [x] Trust and accountability - [ ] Market expansion - [ ] Tax incentives > **Explanation:** Transparency fosters trust and accountability, key components in effective corporate governance.

Thank you for exploring the intricate dynamics of connected persons within corporate structures and engaging with our quiz to enhance your knowledge. Keep striving for excellence in corporate governance!