Related transactions: Overview, definition, and example
What are related transactions?
Related transactions refer to business dealings between parties that have a pre-existing relationship, such as transactions between a company and its shareholders, executives, affiliates, or subsidiaries. These transactions can include loans, asset transfers, service agreements, or contracts that may not be conducted at arm’s length.
For example, if a company hires a consulting firm owned by its CEO’s family member, this would be considered a related transaction. Because these deals involve parties with a relationship, they require transparency to ensure fairness and prevent conflicts of interest.
Why are related transactions important?
Related transactions must be properly disclosed and monitored to prevent conflicts of interest, financial misrepresentation, or unfair advantages. If not handled transparently, these transactions can lead to ethical concerns, regulatory violations, or financial risks for investors and stakeholders.
In publicly traded companies, regulators such as the Securities and Exchange Commission (SEC) require disclosure of related transactions in financial statements to ensure investors have a clear understanding of potential conflicts. For private businesses, defining rules around related transactions can help maintain fairness and protect against favoritism or self-dealing.
Understanding related transactions through an example
Imagine a publicly traded company leases office space from a building owned by its CEO. Because this is a related transaction, the company must disclose it in its financial reports to ensure shareholders are aware of the arrangement and that the lease terms are fair.
In another case, a manufacturing business sells raw materials to its own subsidiary at a discounted rate. This type of related transaction can affect financial reporting and tax obligations, so it must be properly documented to ensure compliance with accounting and regulatory standards.
An example of a related transactions clause
Here’s how a related transactions clause might appear in a contract:
“Any transactions between the Company and its directors, officers, shareholders, or affiliates shall be conducted on an arm’s length basis and shall require prior approval from the Board of Directors. Such transactions must be disclosed in accordance with applicable financial reporting and regulatory requirements.”
Conclusion
Related transactions involve business dealings between parties with a pre-existing relationship, such as a company and its executives, shareholders, or affiliates. While these transactions are common, they require transparency to avoid conflicts of interest and ensure fairness.
By including a clear related transactions clause in contracts and governance documents, businesses can maintain accountability, comply with regulations, and protect stakeholders from potential financial or ethical risks.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.