1. Diritto commerciale II
Paola Lucantoni
Professore associato di Diritto dei mercati finanziari
Università degli Studi di Roma “Tor Vergata”

2. Related- party transactions
Transactions in which the related parties such as directors and controlling shareholders deal with the corporation – traditional self- dealing and managerial compensation - and transactions in which related parties may appropriate value belonging to the corporation – the taking of corporate opportunities and trading in the company’s shares.

3. Related- party transactions
Typically: purchase or sales of assets, goods, or services by related parties, as when a controlling shareholder supplies components to the controlled company.
Other transactions: company guarantees in favour of its parent and transactions with close relatives of managers or with companies owned by their families
Significant corporate actions: parent-subsidiary mergers and freeze-outs of minority shareholders; extraction of private benefits in connection with control transactions; misappropriation arising from securities fraud other than insider tarding

4. Related- party transactions
Problems: acute conflict of interests.
Related parties take business opportunities that should have been offered to the companies instead.
Similarly when trading in the company’s shares on the basis of yet undisclosed price- sensitive corporate information (insider trading), officers, directors and controlling shareholders appropriate part of the value of company information by selling or buying before it is reflected in stock price.

5. Related- party transactions
Category of tunneling: covers all forms of misappropriation of value - such as assets, cash flows, or company’s equity itself – by corporate insiders.

6. Legal strategies for related-party transactions
Permitted it all? No
1. Affiliation strategy
2. Agent incentives strategies
3. The decision rights strategy: shareholder voting.
4. The rules strategy: Prohibiting conflicted transactions.
5. The standards strategy: The duty of loyalty and intra-group transactions review

7. Legal strategies for related-party transactions 1. Affiliation strategy
Mandatory disclosure that alerts shareholders and the market to related-party transactions
Risk: over-enforcement
USA: securities law imposes disclosure duties to all companies that trade in the public market: companies must report annually transactions that exceed US$ and in which directors, executive officers, or large shareholders have a material interest.
EU: International Reporting Standards – EU listed companies have to disclose annually any transaction with directors, senior executives, and controlling shareholders – non material transactions may be omitted – reveal all material related transactions that have not been concluded under normal market conditions.

8. Legal strategies for related-party transactions 2
Legal strategies for related-party transactions 2.Agent incentives strategies
2. Agent incentives strategies
Letting the board decide
Requiring the board to resolve on the transaction without the vote of the interested party
A variation is to reserve the matter to a subset of disinterested directors, the independent ones.

9. Legal strategies for related-party transactions 3
Legal strategies for related-party transactions 3. The decision rights strategy: shareholder voting.
3. The decision rights strategy: shareholder voting.
As an alternative or complement to disinterested board approval of related-party transactions, jurisdictions may require or encourage shareholder approval.
No jurisdiction mandates across-the-board shareholder approval for related-party transactions, not even with controlling shareholders.
“Majority of the minority “shareholder approval is a well established institution in the USA and UK.
In EU, most members states have adopted rules on prior shareholders approval of share-based incentives schemes (Germany, Italy)

10. Legal strategies for related-party transactions 4
Legal strategies for related-party transactions 4. The rules strategy: Prohibiting conflicted transactions.
4. The rules strategy: Prohibiting conflicted transactions.
Only for credit transactions, third party employments contracts and insider trading

11. Legal strategies for related-party transactions 5
Legal strategies for related-party transactions 5. The standards strategy: The duty of loyalty and intra-group transactions review
5. The standards strategy: The duty of loyalty and intra-group transactions review
The duty of loyalty doctrine encompass a variety of labels across jurisdictions, such as the duty of entire fairness, the prohibition against “wrongful profiting from position”, or the crimes of “abuse of corporate assets” /France( and the breach on trust (Germany).
For directors and officers
Controlling shareholders
Groups

12. Ownership regimes and related-party transactions
EU and Brazil: concentrated ownership - especially focused on transactions with dominant shareholders
UK and USA: dispersed ownership - especially focused on transactions with managers and directors