Transactions with affiliates and employees: Overview, definition, and example
What are transactions with affiliates and employees?
Transactions with affiliates and employees refer to business dealings or financial transactions between a company and its affiliated individuals or entities, including its employees, directors, officers, shareholders, or related companies. These transactions may include the purchase or sale of goods or services, lending or borrowing of money, or any other business arrangements. Because of the close relationship between the parties, such transactions may present potential conflicts of interest, which is why they are typically subject to stricter disclosure and regulatory requirements.
Affiliates are typically defined as individuals or entities that have control, are controlled by, or are under common control with the company. This includes parent companies, subsidiaries, and other related entities. Employees are individuals who work for the company and may also include executive officers, directors, or key management personnel.
Why are transactions with affiliates and employees important?
Transactions with affiliates and employees are important because they can raise concerns about conflicts of interest, fairness, and transparency. Since the parties involved have close relationships with the company, these transactions may not be conducted at arm's length, potentially leading to favorable terms or conditions that are not available to third parties.
To prevent fraud, abuse, and unfair advantages, many jurisdictions impose strict rules and regulations on such transactions. For instance, public companies are typically required to disclose related-party transactions in their financial statements to ensure that shareholders and regulators are aware of any potential conflicts of interest. This transparency helps ensure that such transactions are fair and serve the best interests of the company and its stakeholders.
Understanding transactions with affiliates and employees through an example
Imagine a company is selling a piece of equipment to one of its directors at a price below market value. While this transaction may be beneficial to the director, it could raise concerns from other shareholders or investors who may perceive the deal as unfair or a potential conflict of interest. To address these concerns, the company must disclose the transaction, explain the terms, and ensure that it complies with relevant legal and ethical standards.
In another example, an employee of a company may take out a loan from the company or engage in a business transaction with the company, such as purchasing office supplies. This type of transaction could raise questions about whether the terms of the loan or purchase were favorable compared to those offered to external parties. In such cases, it is crucial to ensure that the terms are disclosed, and the transaction is conducted at arm's length to prevent any perception of favoritism or abuse of power.
An example of a transactions with affiliates and employees clause
Here’s how a clause regarding transactions with affiliates and employees might look in a contract:
“The Company agrees that any transaction involving the sale, lease, or transfer of assets between the Company and its affiliates or employees shall be conducted on terms that are at least as favorable as those that would be available to third parties in an arms-length transaction. The Company shall disclose all such transactions in its financial statements and ensure that they are in compliance with applicable laws and regulations regarding related-party transactions.”
Conclusion
Transactions with affiliates and employees are common in business but require careful handling to avoid potential conflicts of interest and ensure fairness. These transactions may involve relationships where one party has influence over the other, raising concerns about whether the terms are equitable. To maintain transparency and protect the interests of the company and its stakeholders, such transactions must be properly disclosed, conducted at arm's length, and compliant with legal regulations. By doing so, businesses can mitigate risks, maintain integrity, and avoid legal or reputational issues related to related-party transactions.
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.