Note · Corporate Law & Governance Advisory
Related-party transactions: process is the substantive protection
Most related-party disputes are not about whether the transaction was fair. They are about whether the company can demonstrate how it concluded that it was.
6 min read
Related-party frameworks are ordinarily approached as a disclosure and approval exercise: identify the relationship, obtain the approval, make the disclosure. That approach satisfies the form of the requirement and misses its purpose.
What an examiner looks for
The question in a later examination is rarely whether an approval existed. It is whether the approval was informed - whether the interested party abstained, whether the terms were benchmarked against an arm's-length alternative, and whether the board had before it the information required to reach a view.
A minimum standard of record
- A written identification of the relationship and its nature.
- A benchmark or basis on which the terms were assessed as arm's-length.
- Recorded abstention of the interested director.
- A minute reflecting the board's reasoning, not only its conclusion.
Companies that maintain this record treat related-party approvals as unremarkable governance. Companies that do not find that a commercially ordinary transaction becomes, years later, the centre of a dispute about good faith.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Boards should consult qualified legal counsel for company-specific guidance.