Related Party Transactions

Abstract

This chapter examines the legal and policy implications of transactions between a corporation and a “related party.” It begins by spelling out the reasons why related party transactions (RPTs) are a common phenomenon worldwide before discussing RPTs as an instrument for tunneling and why many jurisdictions provide for specific regulations on RPTs in addition to general rules or standards against dominant shareholders’ abuse. It then looks at the legal tools that can prevent the use of RPTs for tunneling purposes, namely: prohibitions, procedural safeguards such as majority of the minority shareholder approval and independent directors’ involvement, mandatory disclosure, external fairness opinions, and ex post standard-based judicial review. Finally, the chapter discusses the challenges of enacting reforms that would make regulation of RPTs (or tunneling) more effective in preventing (minority) shareholder expropriation, and suggests the importance of sophisticated enforcement actors such as experienced courts and/or active, committed securities regulators in battling tunneling as a business practice.