Related Party Transactions

This paper will be included as a chapter in the second edition of The Oxford Handbook of Corporate Law and Governance, edited by Jeffrey Gordon and Wolf-Georg Ringe (Oxford University Press: forthcoming) and is thus an updated version of the chapter appeared in its first edition (a version of which, under the title Related Party Transactions: Policy Options and Real-World Challenges (with a Critique of the European Commission Proposal), was published in 16 European Business Organization Law Review 1 (2015) and is available in working paper form at https://ssrn.com/abstract=2505188).

The chapter provides a legal and policy analysis of transactions between a corporation and one of its “related parties.” It first highlights the reasons why related party transactions (“RPTs”) are so common around the world. Next, it better identifies the phenomenon as a specific form of potentially abusive behavior by dominant shareholders and managers, i.e. as an instrument for tunneling, asking why many jurisdictions provide for specific regulations on RPTs in addition to general rules or standards on tunneling. Then, it describes the main legal tools available to prevent corporate agents from diverting value from the corporation via RPTs. Finally, it shows that no regulation of RPTs (or tunneling) can succeed in preventing minority shareholder expropriation in the absence of sophisticated enforcement actors (specialized courts and/or active and committed securities regulators) and non-legal supporting institutions, like independent financial media and anti-tunneling social norms.