Related-Party Transactions
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 special relationships with the company. Due to the potential for 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 originated from the need for corporate governance and financial management. As companies grew in size and complexity, the relationships of interest within and outside the company became more intricate. In the mid-20th century, with the development of capital markets and the improvement of corporate law, related party transactions became a focal point for regulators and investors.
Categories and Characteristics
Related party transactions can be categorized into several types, including:
- Sales and Purchase Transactions: Transactions of goods or services between the company and its related parties.
- Lending Transactions: Financial lending activities between the company and its related parties.
- Asset Transfers: Buying or selling of assets between the company and its related parties.
- Guarantee Transactions: Guarantees or counter-guarantees provided by the company for its related parties.
Specific Cases
Case 1: A company sells a batch of raw materials to its parent company at a price significantly lower than the market price, resulting in reduced profits for the company and gains for the parent company. In this case, the parent company benefits from the low-cost purchase, harming the subsidiary's interests.
Case 2: A company provides an interest-free loan to another company controlled by its chairman, leading to the occupation of the company's funds and affecting its normal operations. Such related party transactions may cause dissatisfaction among other shareholders, who may view it as an abuse of power by the chairman.
Common Questions
Question 1: How to identify related party transactions?
Answer: Identifying related party transactions requires understanding the company's shareholder structure, management relationships, and partnerships with other enterprises. The company should establish a sound internal control system to ensure the transparency of related party transactions.
Question 2: What are the risks of related party transactions?
Answer: The main risks include benefit transfer, harm to the company and shareholders' interests, and distortion of financial statements. The company should strengthen the audit and supervision of related party transactions to ensure fairness and justice.
