Related-party transactions — deals between a public company and its directors, officers, 5-percent shareholders or their affiliates — are governed by two overlapping regimes: SEC disclosure under Item 404 of Regulation S-K, which requires describing any transaction above $120,000 in which a related person has a direct or indirect material interest, and exchange listing rules (NYSE 303A.13, Nasdaq 5630), which require an independent review of the transaction's terms before it occurs. The audit committee or an independent director body must affirm the transaction's appropriateness; failure is both a listing violation and, when undisclosed, a securities-law problem that plaintiffs plead as evidence of governance failure.
USA Post publishes information about governance requirements, not legal advice.
What counts as a related-party transaction?
Item 404(a) reaches transactions exceeding $120,000 in any fiscal year in which a related person — director, director nominee, executive officer, 5-percent beneficial holder, or immediate family members of any of them — has a direct or indirect material interest. The definition is functional: loans, leases, service arrangements, charitable donations to organizations a director leads, indemnification agreements, even employment of an officer's spouse. Two safe harbors exist in practice: transactions in the ordinary course on arm's-length terms, and the new SEC accommodation finalized in October 2022, which lets companies skip re-disclosing transactions under $120,000 even when aggregated with prior disclosures of the same type — the rule modernization that trimmed schedule counts without changing the material-interest trigger.
What does the exchange review requirement demand?
Nasdaq 5630 requires the audit committee or a majority of independent directors to review and approve any related-party transaction before it is entered into, in a documented determination that it is in the company's best interests. NYSE 303A.13 is similar but reaches director independence determinations: related-party transactions above thresholds are one of the facts that can defeat a director's independence, feeding back into committee composition. The review should be genuinely pre-closing: Delaware litigation — including the In re Match Group line on controller-touched transactions — has treated after-the-fact ratification as weak protection, and the exchange rules' text says "prior to" entry. Boards that route RPTs through counsel first, with a written summary of terms, market benchmarks and alternatives considered, build the record both regimes expect.
Why are RPTs a litigation magnet?
Because they combine the two facts plaintiffs need: a conflict and a measurable transaction. Delaware's entire-fairness doctrine applies when a controlling shareholder stands on both sides, and the In re Match Group decisions (2022-2023) held that even an uncontrolled company's conflicted-controller transaction can lose Corwin cleansing where disclosure omitted the controller's interest in a material way — the IAC/Match IPOvaluation dispute that settled for a governance-reform package plus payment. More broadly, undisclosed RPTs recur in accounting-fraud cases: revenue from related parties (the Luckin Coffee and Sino-Forest pattern) is where auditors and short sellers look first, and the PCAOB's standards require auditors to identify and test related-party relationships as a fraud risk factor.
How should the review process be built?
- Maintain a rolling RPT inventory: annual D&O questionnaires mapping every related person, affiliate and family member, refreshed with each nomination.
- Adopt a written RPT policy defining covered transactions, materiality thresholds, the review body, and documentation requirements — the artifact SEC comment letters ask for.
- Route each proposed RPT to the audit committee before signing, with counsel's summary of Item 404 status, market terms and independence implications.
- Track materiality throughout the year — threshold crossings mid-year change both disclosure and review duties.
- Reconcile three ledgers at each reporting date: the D&O questionnaire responses, the audit-committee approvals, and the Item 404 disclosures; discrepancies are where comment letters and litigation begin.
What are the auditor's expectations?
Under AS 2410 (related parties and significant unusual transactions, adopted 2022), the auditor must identify related parties and significant unusual transactions independently of management, assess the business rationale, and treat unexplained arrangements as fraud risk. The practical effect inside the company: finance teams must give auditors the same inventory the audit committee holds, with contractual documents, and expect challenge on valuation of services between affiliates — the recurring area where accounting estimates are least verifiable. Audit committees that cannot produce a clean RPT inventory should expect the auditor to say so in writing.
Are RPTs inherently suspect?
No — most are ordinary and defensible: a director's firm provides legal services at market rates; the company leases space from an affiliate. The doctrine's point is process, not prohibition: conflicts handled through disclosure, independent review and fair terms are lawful and common; conflicts handled through silence are where private ordering fails. The governance question each RPT poses is simple — would the company accept these terms from a stranger — and the file that answers it is what every regulator, auditor and plaintiff will read.
For more context, read Going Private Under Rule 13e-3: Special Committees and Minority Protection.
For more context, read special committee conflicted transaction.
For more context, read hfcaa delisting.