What is Related-Party Transactions?

690 reads · Last updated: December 5, 2024

Related-Party Transactions refer to transactions that occur between a company and its related parties. Related parties can include shareholders, directors, management, subsidiaries, parent companies, joint ventures, or other entities or individuals with a special relationship with the company. Due to potential conflicts of interest, RPTs require careful scrutiny to prevent the transfer of benefits and ensure the protection of the company and its shareholders.

Definition

Related party transactions refer to transactions that occur between a company and its related parties. Related parties can include the company's shareholders, directors, management, subsidiaries, parent companies, joint ventures, or other entities or individuals with a special relationship with the company. Due to potential conflicts of interest, these transactions require special attention to prevent the transfer of benefits and protect the interests of the company and its shareholders.

Origin

The concept of related party transactions developed alongside the need for corporate governance and financial transparency. In the late 20th century, as corporate structures became more complex and international operations increased, the regulation of related party transactions became an essential part of financial reporting and auditing standards worldwide.

Categories and Features

Related party transactions can be categorized into various types, including sales and purchase transactions, lending transactions, asset transfers, and service provisions. Their features include transaction prices that may not align with market standards and terms that may favor the interests of related parties. Application scenarios often involve the reallocation of internal resources or strategic collaborations within a company.

Case Studies

Case Study 1: A large multinational company transferred assets between its subsidiary and parent company, leading to asset undervaluation and harming minority shareholders' interests. Case Study 2: A publicly listed company engaged in procurement transactions with a business controlled by its board members, resulting in purchase prices above market rates and a decline in company profits.

Common Issues

Common issues investors face include identifying related party transactions, assessing their impact on the company's financial health, and preventing potential conflicts of interest. A common misconception is that all related party transactions are detrimental, whereas, in reality, well-structured related party transactions can create synergies.

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