Notes:

• Definition: A transaction between the company and a “related party” (e.g., a director, executive, major shareholder, or their immediate family members).
• The Risk: RPTs are prone to conflicts of interest where the related party may receive terms more favorable than an arm’s-length transaction with a third party.
• Disclosure Requirements:
  • SEC Rule 14a-4 / Item 404 of Regulation S-K: Companies must disclose all RPTs where the amount exceeds $120,000 and the related party has a direct or indirect material interest.
  • Content: Must describe the nature of the relationship, the amount of the transaction, the amount involved, and the basis for determining the price.
• Approval Processes:
  • Audit Committee Review: In the US, the Audit Committee (or another independent committee) must review and approve or ratify all RPTs.
  • Independent Directors: Transactions must be approved by disinterested directors who have no stake in the deal.
  • Shareholder Approval: Required for certain major RPTs or if the transaction involves a significant change in control.
• Safe Harbors (Delaware Law):
  • A transaction is protected from “entire fairness” review (a strict judicial standard) if:
    1. It is approved by a majority of independent directors after full disclosure.
    2. It is approved by a majority of disinterested shareholders.
    3. It is proven to be “fair” to the corporation.
• Whistleblower Role: Employees are often the first to spot undisclosed RPTs. Robust whistleblower channels are essential for detecting these conflicts.