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Legal glossary

Relationships with related persons: Overview, definition, and example

Relationships with related persons refer to connections or affiliations between an individual or business and others who are considered "related" under legal, financial, or regulatory definitions. These "related persons" can include family members, business partners, subsidiaries, affiliates, or entities that share common ownership or control. In a business context, related persons are typically involved in transactions or agreements with the business, and their relationships are often subject to specific rules and disclosures to ensure transparency, fairness, and compliance with laws.

Relationships with related persons are important because they can create potential conflicts of interest, affect financial decision-making, or impact the fairness of transactions. For example, if a business enters into a contract with a related person (such as a family member or a company owned by the same individual), it is essential to disclose and review these relationships to avoid any unethical or improper dealings. In many cases, businesses are required to disclose these relationships to regulators, shareholders, or other stakeholders to ensure that transactions are fair, transparent, and compliant with laws, such as anti-corruption regulations or tax laws.

Imagine a small business owner, Sarah, who runs a retail store. Sarah’s brother, Mike, owns a supply company that provides the products Sarah sells in her store. If Sarah buys products from Mike’s company, this could be considered a related person transaction. This relationship may require Sarah to disclose the arrangement to her stakeholders, such as investors or auditors, to ensure there are no conflicts of interest or concerns about preferential treatment. The business might also need to ensure that the terms of the agreement—such as pricing or payment terms—are fair and in line with market standards.

In another example, a company may have subsidiaries or affiliated businesses that provide services to each other. For instance, a parent company might have a subsidiary that provides IT support to its other subsidiaries. Relationships with related persons could apply in this case if the parent company is providing services or making transactions between its subsidiaries. These arrangements often need to be documented and assessed to ensure they are conducted on an arm's-length basis and do not violate anti-competition or tax laws.

Here’s how a clause about relationships with related persons might appear in a contract:

“The Parties agree to disclose any existing relationships with related persons that may affect the terms of this Agreement, including any financial interests, directorships, or family connections. Each Party agrees to ensure that all transactions with related persons are conducted at arm’s length, with terms that are fair and in accordance with industry standards.”

Conclusion

Relationships with related persons are important to recognize and manage because they can raise concerns about conflicts of interest, fairness, and transparency in business transactions. Whether in the form of family connections, business partnerships, or ownership structures, these relationships often require special attention and disclosures to ensure that decisions are made in an ethical and legally compliant manner. By understanding the potential impacts of related person transactions, businesses can avoid legal issues and maintain the trust of stakeholders.

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.

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