Related party transactions by directors/managers in public companies: a data-supported analysis

Abstract

Related party transactions (RPTs) are one of the primary ways for corporate insiders to expropriate company value at the expense of (minority) shareholders and creditors, and thus attract close regulatory/investor attention around the world. Conventional wisdom in corporate law theory holds however that RPTs entered into by directors/managers (rather than controlling shareholders) in controlled and dispersedly-owned companies are of lesser concern. In controlled companies, such transactions would be effectively monitored by controlling shareholders whereas, in dispersedly-owned companies, executive compensation arrangements would be preferable to RPTs to divert company value for directors/managers. This article challenges this conventional wisdom and puts forward various other theories under which RPTs entered by directors/managers remain a significant concern in terms of value-diversion in both controlled and dispersedly-owned companies.The article then presents hand-collected data of RPTs entered into by directors/managers who are not significant/controlling shareholders and/or by their related entities in companies listed on the prime standard of the German stock exchange for the years of 2018 and 2019. This dataset and its evaluation provide preliminary indications and exploratory evidence regarding the threat posed by RPTs entered into by abovementioned persons. In addition, up-to-date share-ownership data of those companies and several findings regarding disclosure practices are provided. The article closes with proposing a few regulatory improvements and implications.

Separating abusive from efficient related-party transactions: evidence from India

“…Despite lower yield and smaller size (INR 0.12 billion, Tabel A1), holding parties have incentives to trade services/goods at better pricing to make money. Individual directors or relatives may find even the small size attractive (Gozlugol, 2021), undertake phantom RPTs [3] and can easily conceal them. Also, they are typically not Separating abusive from efficient RPTs operating entities and hence lack capabilities in minimizing transaction costs and providing scale/scope advantages in trading goods/services.…”