Related-party Transactions (RPT)

Short definition

The term “related-party transaction” (or short: RPT) describes arrangements and transactions between a publicly traded company and parties the company already has a pre-existing business relationship with. Related-party transactions often carry potential for conflicts of interest. Therefore, they are carefully observed by regulatory agencies. Regulations regarding these transactions aim to ensure that transactions are as conflict-free as possible and do not have any negative effects on shareholders’ values or companies’ profits. RPTs must be publicly reported to ensure their legality as well as ethical standards.

Implications and conflicts of interest arising from related-party transactions

Related-party transactions can be a variety of business agreements ranging from loan agreements and leases to service agreements and sales. In most cases related parties are shareholder groups, subsidiaries, or business affiliates. While related-party transactions are not illegal, they hold the potential for conflicts of interest as they can disrupt the business environment. Favourable treatment of close associates limits competition of the free market. Because of this, related-party transactions must in many cases be approved by a company’s board of directors or management.

RPTs and SRD II

Since SRD II has come into effect, related-party transaction rules have changed. The definition for “related parties” is provided by IAS 24. However, exact definitions differ in each country as EU countries did not implement SRD II identically.

Related-party transactions with the same related party within the course of one financial year must be aggregated. Once the materiality threshold set by the EU country the company operates in is reached, approval and disclosure requirements must be fulfilled to all aggregated transactions (not just the one resulting in the threshold being reached) with said related party.

Relevant issuers are required to

  • obtain approval from the board of directors before an RPT is entered,
  • ensure that no director or associate of the related party participates in the vote when the board of directors considers the RPT and
  • disclose the terms of RPTs immediately once they are agreed on.

ROW issuers are only required to announce RPTs. Additionally, all issuers are required to establish proper procedures and control systems that are capable of assessments of RPTs regarding possible conflicts of interest that would disturb ordinary course of business or the free market. These assessments and votes must not include the related party itself or its associates to ensure impartiality.