What is Arm'S Length Transaction?
531 reads · Last updated: December 5, 2024
An arm's length transaction refers to a business deal in which buyers and sellers act independently without one party influencing the other. Arm's length transactions assert that both parties act in their own self-interest and are not subject to pressure from the other party. They also assure others that there is no collusion between the buyer and seller. In the interest of fairness, both parties usually have equal access to information related to the deal.
Definition
The autonomy of transactions refers to the independence of buyers and sellers in a transaction, where neither party influences the other. It indicates that both parties prioritize their own interests and are not pressured by the other party. It also assures others that there is no collusion between the buyer and the seller. For fairness, both parties usually have access to information related to the transaction.
Origin
The concept of transaction autonomy originates from the fundamental principles of market economy, emphasizing the independence and fairness of parties in a free market. As market economies developed, this concept became widely accepted and applied, especially in large-scale transactions and international trade.
Categories and Features
Transaction autonomy can be categorized into full autonomy and partial autonomy. Full autonomy means both parties are completely independent in the transaction, with no external interference or influence. Partial autonomy may involve some external factors but does not affect the core independence of the transaction. Features of autonomous transactions include high transparency, symmetrical information, and equal status of both parties.
Case Studies
A typical case is the transactions between Apple Inc. and its suppliers. Apple ensures that its suppliers maintain autonomy in transactions to avoid conflicts of interest and unfair competition. Another example is Tesla's procurement of battery materials, where it maintains an independent negotiating position with suppliers to ensure fairness and transparency in transactions.
Common Issues
Common issues investors face when applying transaction autonomy include ensuring symmetrical information and identifying potential conflicts of interest. It is usually recommended to maintain transaction autonomy through contract terms and third-party audits.
