sboghossian Related Party Transaction Policy
When to use this
Use this skill when:
- A company is establishing or updating its corporate governance framework and needs a formal RPT policy.
- A listed or pre-IPO company requires an RPT policy that satisfies stock exchange listing rules (DFM, ADX, Tadawul, EGX).
- An institutional investor (PE fund, sovereign wealth fund, DFI) requires the portfolio company to adopt an RPT policy as a condition of investment.
- A board audit committee needs a policy to guide its review of management's related-party transaction disclosures.
- A company's auditors have flagged related-party transactions without adequate policy coverage.
- A company is undergoing M&A due diligence and needs to demonstrate governance controls.
Required inputs
| Input | Why it matters | Default if omitted |
|---|---|---|
| Company name and entity type | Policy must reference the specific company and its governing law | Ask before drafting |
| Jurisdiction of incorporation | Determines which legal definitions of "related party" apply and which mandatory disclosure rules govern | Ask; default to UAE onshore if unclear |
| Ownership and group structure | Determines who counts as a related party (shareholders above threshold, parent companies, sister entities) | Ask: "Who owns the company and is it part of a group?" |
| Board and committee structure | Determines which body approves which tier of transaction | Ask: does the company have an audit committee? |
| Approval thresholds (if pre-determined) | Allows customization; otherwise use market-standard thresholds | Default tiers: management approval below 1% of net assets; board approval 1–5%; shareholder approval above 5% |
Optional inputs
- Exchange listing rules applicable — DFM, ADX, Tadawul, EGX each have specific RPT disclosure and approval obligations for listed companies.
- Sector-specific rules — banks (CBUAE requirements), insurance companies, investment funds each have sector-specific conflict-of-interest rules.
- Existing conflict-of-interest policy — the RPT policy may need to be consistent with or replace an existing CoI policy.
Document structure
Purpose and scope
- Why the policy exists: protecting minority shareholders, ensuring arm's length terms, meeting regulatory obligations.
- Who it applies to: directors, senior management, controlling shareholders, and their affiliates.
Definitions
- Related party: typically includes directors, key management personnel, controlling shareholders (usually defined as holding ≥10% or ≥20%), entities controlled by or controlling the above, immediate family members. The precise definition tracks the applicable accounting standard (IFRS IAS 24) and local company law.
- Related party transaction (RPT): transfer of resources, services, or obligations between the company and a related party, regardless of whether a price is charged.
- Material RPT: any RPT above a defined threshold (see approval tiers below).
Identification and disclosure of related parties
- Annual declaration process: all directors and senior management must submit an annual written declaration of their related-party interests.
- Ongoing disclosure obligation: any new related-party relationship must be disclosed within [5/10/14] days of arising.
- Register of related parties: maintained by company secretary; updated at each board meeting.
Identification and disclosure of RPTs
- How to identify whether a proposed transaction involves a related party (screening against the register).
- Advance disclosure to the board / audit committee before entering into any RPT.
- Annual summary of RPTs to be included in the company's financial statements (IFRS IAS 24 requirement).
Approval framework
Transaction Value (as % of net assets) Approval Required Below 1% CEO / Management approval; notification to board 1% – 5% Audit Committee review and recommendation; Board approval Above 5% Board approval; shareholder approval (ordinary or special resolution depending on jurisdiction) Any transaction where director has a direct financial interest Board approval with interested director recusing; independent directors vote Arm's length standard
- All RPTs must be concluded on terms no less favorable to the company than would be available in a transaction with an unrelated third party on equivalent terms.
- For material RPTs, the board (or audit committee) should obtain an independent valuation or fairness opinion.
- The basis for concluding the terms are arm's length must be documented.
Interested party recusal
- Any director or senior manager who is a party to or has an interest in an RPT must:
- Disclose the interest in full to the board before deliberation.
- Recuse from voting on the transaction.
- Leave the meeting during deliberation if requested.
- Minutes must record the recusal and the basis for the board's determination that terms are arm's length.
- Any director or senior manager who is a party to or has an interest in an RPT must:
Prohibited transactions
- Loans to directors (prohibited or restricted under most MENA company laws).
- Self-dealing contracts not approved under this policy.
- Transactions designed to circumvent this policy by artificial structuring.
Record-keeping and reporting
- All approved RPTs: documented in board minutes and company register.
- Annual report / financial statements: summarize material RPTs per IFRS IAS 24.
- Regulator reporting: as required by applicable exchange listing rules or sector regulator.
Sanctions for non-compliance
- Failure to disclose a related-party interest is a breach of fiduciary duty.
- Unapproved RPTs may be voidable at the company's election.
- Directors in breach may be liable for damages and disqualification.
Policy administration and review
- Owner: company secretary / general counsel.
- Review frequency: annual, or whenever a material change in ownership or governance occurs.
- Approval: board of directors.
Jurisdictional notes
UAE — onshore (Federal Decree-Law No. 32 of 2021 on Commercial Companies)
- Art. 166+ governs conflicts of interest for LLC managers; Art. 166 requires disclosure and prohibition on voting.
- PSC/PJSC (public companies): SCA Governance Code requires detailed RPT disclosures in annual reports and advance board approval.
- Listed companies: DFM/ADX listing rules require immediate disclosure to the exchange of material RPTs.
DIFC
- DIFC Companies Law (DIFC Law No. 5 of 2018): Companies Act-style duty of directors to avoid conflicts; related-party transactions require board approval with interested director recusal.
- Investment business: DFSA Rules impose additional conflict management requirements on regulated firms.
KSA (Saudi Corporate Governance Regulations, CMA)
- CMA Corporate Governance Regulations require listed companies to have an RPT policy, audit committee oversight, and semi-annual disclosure of all RPTs.
- Any RPT with a controlling shareholder (holding ≥5%) of a listed company requires shareholder approval at general assembly.
Egypt (EGX Listed Companies)
- FRA Corporate Governance Code requires listed companies to disclose RPTs in annual reports.
- Companies Law No. 159 of 1981 requires shareholder approval for transactions between the company and its directors.
Lebanon
- Lebanese Commercial Code requires disclosure of director interests; prohibits self-dealing contracts without general assembly approval.
- Banking sector: BDL Circular 44 imposes strict related-party lending limits.
Drafting standards
- Define "related party" with reference to IAS 24 (internationally recognized) and supplement with the specific local-law definition where they differ.
- Use a clear tiered approval table — this is the core operative provision that practitioners will apply.
- Include a worked example in an annex (e.g., "A director owns 20% of a supplier company; the company proposes to award the supplier a USD 500,000 contract; which approval level applies?").
- Avoid vague language like "significant transaction" — tie all thresholds to measurable financial metrics.
Common mistakes
- Using IFRS IAS 24 definition alone without checking local law. Local company laws (UAE, KSA) may define related party more broadly or differently; the policy should capture both.
- No recusal procedure for the CEO/MD. Policies often cover directors but forget that the CEO is also an officer subject to conflict rules.
- Threshold set too high. A 10% of net-assets threshold for shareholder approval may miss many material transactions in a large company; calibrate thresholds to the company's actual transaction profile.
- No standalone prohibition on director loans. Failing to include this creates ambiguity — most MENA company laws prohibit or restrict loans to directors; state it explicitly.
Related skills
- [[prompt-pack-shareholders-agreement]]
- [[prompt-pack-shareholders-resolution]]
- [[prompt-pack-regulatory-filing-checklist]]
- [[prompt-pack-share-purchase-agreement]]
- [[heuristic-always-state-jurisdiction-first]]