Transactions with affiliates: Overview, definition and example
What are transactions with affiliates?
Transactions with affiliates refer to any dealings, agreements, or arrangements between a company and its affiliated entities or individuals, such as subsidiaries, parent companies, or individuals with significant ownership or influence. These transactions can include loans, sales, leases, or service agreements.
For example, a company might lease office space to its subsidiary, or a parent company might provide administrative support to a related business.
Why are transactions with affiliates important?
Transactions with affiliates are important because they often involve related parties and can raise concerns about fairness, transparency, and conflicts of interest. Clear provisions governing these transactions in contracts ensure that they are conducted on an arm’s-length basis—meaning under terms comparable to those in transactions with independent third parties.
For businesses, properly handling transactions with affiliates helps protect against regulatory scrutiny, shareholder disputes, and reputational risks. It also ensures compliance with laws and accounting standards.
Understanding transactions with affiliates through an example
A company’s board approves a loan to its subsidiary to fund a new project. The agreement specifies that the loan will carry an interest rate equivalent to market rates, ensuring it meets arm’s-length standards. By documenting the terms transparently, the company demonstrates fairness and mitigates potential conflicts of interest.
An example of a transactions with affiliates clause
Here’s how a transactions with affiliates clause might appear in a contract:
“All transactions between the Company and its Affiliates shall be conducted on an arm’s-length basis and in accordance with market terms. The Company agrees to disclose any material transactions with Affiliates to the Board of Directors and ensure compliance with applicable laws and regulations.”
Conclusion
Transactions with affiliates require clear and transparent governance to avoid conflicts of interest, ensure fairness, and maintain compliance with legal and regulatory standards. By including well-defined clauses in agreements, businesses can protect their interests, reduce risks, and promote trust among stakeholders. Proper handling of affiliate transactions is essential for maintaining accountability and regulatory compliance.
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.