Chapter 6
Related-Party Transactions
The value diversion is a core issue in the relationship between managers and shareholders and between
controlling and other shareholders. Techniques for value diversion are: related party transactions
Main categories:
Transaction in which related parties such as directors and controlling shareholders deal with the
corporation (traditional self-dealing and managerial compensation).
Transactions in which related parties may appropriate value belonging to the corporation
(corporate opportunities and trading in the company’s shares).
Self dealing: an influential manager or a controlling shareholder will transact with the company on
terms less favorable than could be obtained in an arm’s length negotiation. Typically refers to
purchase or sales of assets by related parties or transaction in favor of its controlling shareholder/
close relatives (high conflict of interests).
Corporate opportunity cases: related parties take business opportunities that should have been
offered to their companies instead (insider trading→ thanks to undisclosed company information
selling or buying shares before the other).
Why RPT permitted at all?
The answer differ, according to the nature of the transaction and to the size of the firm;
o in a small company, directors, officers and controlling shareholders are often the only parties with
whom small company can transact; A self-dealing transaction may be entered into in more
favourable terms with an insider who knows the company and the risks involved than with an
unrelated but distrustful party (information as value).
→ None would agree to work for the corporation for free (managers cannot be prevented from
investing in their companies or controlling shareholders from selling their companies’ shares).
Legal strategies for related party transaction
■ The affiliation strategy
➢ Mandatory disclosure: alerts shareholders and the markets of the existence of the RPT.
Advantages:
capital and labour markets as well as financial analysts and media know about RPTs
increased likelihood of actions against the extraction of private benefits
virtually no constraints on legitimate self-dealing.
Disadvantages:
Actors will be more likely either to challenge even legitimate related party transactions
because they believe in good faith that the transaction is harmful to the corporation or just
to obtain a lucrative statement.
Related-Party Transactions
The value diversion is a core issue in the relationship between managers and shareholders and between
controlling and other shareholders. Techniques for value diversion are: related party transactions
Main categories:
Transaction in which related parties such as directors and controlling shareholders deal with the
corporation (traditional self-dealing and managerial compensation).
Transactions in which related parties may appropriate value belonging to the corporation
(corporate opportunities and trading in the company’s shares).
Self dealing: an influential manager or a controlling shareholder will transact with the company on
terms less favorable than could be obtained in an arm’s length negotiation. Typically refers to
purchase or sales of assets by related parties or transaction in favor of its controlling shareholder/
close relatives (high conflict of interests).
Corporate opportunity cases: related parties take business opportunities that should have been
offered to their companies instead (insider trading→ thanks to undisclosed company information
selling or buying shares before the other).
Why RPT permitted at all?
The answer differ, according to the nature of the transaction and to the size of the firm;
o in a small company, directors, officers and controlling shareholders are often the only parties with
whom small company can transact; A self-dealing transaction may be entered into in more
favourable terms with an insider who knows the company and the risks involved than with an
unrelated but distrustful party (information as value).
→ None would agree to work for the corporation for free (managers cannot be prevented from
investing in their companies or controlling shareholders from selling their companies’ shares).
Legal strategies for related party transaction
■ The affiliation strategy
➢ Mandatory disclosure: alerts shareholders and the markets of the existence of the RPT.
Advantages:
capital and labour markets as well as financial analysts and media know about RPTs
increased likelihood of actions against the extraction of private benefits
virtually no constraints on legitimate self-dealing.
Disadvantages:
Actors will be more likely either to challenge even legitimate related party transactions
because they believe in good faith that the transaction is harmful to the corporation or just
to obtain a lucrative statement.
