Related-Party Transaction

Intermediate

A related-party transaction is a deal or arrangement between a company and parties that have a close relationship with it, such as its directors, major shareholders, their family members or other companies they control.

Transactions between related parties may not be made on the same terms as deals between independent parties. A company might buy goods from a business owned by its chief executive at a higher price than the market rate, or lend money to a major shareholder on unusually favourable terms.

Such transactions are not necessarily wrong. Many are perfectly normal, such as group companies trading with each other. But they create a risk that one party benefits at the expense of others, especially minority shareholders.

For example, a company might rent its head office from a property firm owned by its chairman. If the rent is above market rates, value is effectively being transferred from the company's shareholders to the chairman.

Accounting standards require companies to disclose related-party relationships and significant transactions in their financial statements, including the nature of the relationship and the amounts involved. Many stock exchanges and company laws also require independent directors or shareholders to approve significant related-party transactions.

Investors and auditors look closely at these disclosures, because hidden or unfair related-party transactions have played a role in a number of corporate scandals.

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