Related party transactions - Legal strategies for related party transactions
5 important questions on Related party transactions - Legal strategies for related party transactions
What are the legal constraints for related-party transactions? TQ
1. Affiliation strategy (mandatory disclosure; and dissolution and exit rights)
2. Agent incentives (trusteeship)
3. Decision rights (shareholder approval)
4. Agent constraints (rules and standards)
5. Appointment rights
Discuss the values of requiring a disinterested or independent director to approve transactions, as well as the downside. TQ
Values:
- compliance
- fair
- raise questions about related party transactions
Down sides:
- Major costs of board approval
- Independent director may not be a loyal trustee
What are the three prohibited related-party transactions? TQ
p. 158-159
1. Credit transactions: Frans and US prohibit loans between a company and one of its directors
2. Third Party employment contracts: Germany has a non-compete rule for top executives in closely-held companies.
3. Some forms of insider trading: prophylactic restrictions on short-term trading and direct bans on trading on material inside information
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What is duty of loyalty? What are examples of this? TQ
Duty of loyalty: to control related-party conflicts and limit the risk of assets or information diversion. It is a fairness standard which requires judges to determine ex-post whether shareholders are worse off as an outcome of the transaction
Examples:
1. Duty of entire fairness
2. Prohibiting "wrongful profiting from position"
3. Crimes of "abuse of corporate assets" (France)
4. Breach of trust (Germany)
What is the Rozenblum doctrine? TQ
Rozenblum doctrine: a french corporate parent may legitimately divert value from one of its subsidiaries if three conditions are met:
1. The structure of the group is stable
2. The parent is implementing a coherent group policy
3. There is an overall equitable intra-group distribution of costs and revenues
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