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Related Party Transactions and Minority Shareholder Rights

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Related party transactions involve parties who can control the terms of a transaction in their favor potentially at the cost of the company. They include management, board members and controlling shareholders. The publication reviews provisions covering related party transactions and the protection of minority shareholder rights  in 31 jurisdictions, both OECD and non-OECD. In addition, the regulatory and legal systems that have beeen developed in five jurisdictions are reviewed in detail and allow a wide range of experience to be compared and lessons drawn. They are, Belgium, France, Italy, Israel and India. 

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Assessment and Recommendations

Around the world, the potential to abuse related party transactions (RPTs) covering both equity and non-equity RPTs is viewed as an important policy issue because of some high profile cases that have damaged market integrity through inequitable treatment of shareholders. Jurisdictions have responded in many different ways and efforts to manage such transactions are ongoing. The problems raised center around an acute policy-induced trade-off. On the one hand, the policy process or consensus accepts that related party transactions can be economically beneficial, especially in company groups where there are often developmental arguments that they substitute for under-developed markets and institutions. Therefore, with some exceptions such as loans to directors, RPTs are not banned. Once such an approach is in place it is difficult to change so that there is strong path dependence with reforms often marginal. On the other hand, there is a clear concern that such transactions can be abused by insiders such as executives and controlling shareholders. Indeed, concern to control corporate self-dealing has been a key aspect of the development of corporate law in many countries over the past century. Searching for a balance is ongoing as institutions and economies change. However, as this report demonstrates, the third corporate governance peer review of the OECD Corporate Governance Committee, effective overall solutions have still not been found in many jurisdictions. There is thus a great need to exchange experiences.

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