Study on related party transactions
09 Feb 2009
The CFA Institute Centre for Financial Market Integrity has released a study titled Related-Party Transactions: Cautionary Tales for Investors in Asia.
Focusing on Hong Kong, mainland China, and South Korea and taking the perspective of the investor, the study discusses the nature and motivation of these transactions and identifies circumstances where related party transactions have compromised minority shareholders. The study explores the effectiveness of current regulations aimed at protecting shareholders' interests and offers the following recommendations to protect investors:
- Investor vigilance: Investors should try to engage controlling shareholders when transactions are disclosed and they should be more vigilant in examining them when they are put up for a vote.
- Effective approval and disclosure: Upon determination of fairness by an independent advisor, transactions should be approved by 'disinterested' directors and disclosed to investors in a timely manner. If a transaction is material, it should also be approved by shareholders.
- Corporate board independence: In situations where managers are also majority shareholders, independent directors have a greater onus in exercising their duties to protect the interests of independent shareholders.
- Greater transparency: Companies should voluntarily disclose the identities and the level of ownership of related parties, and also the policies in place to monitor and report such related party transactions.
- Statutory backing of regulations: Given the extent of losses minority shareholders could suffer from abusive transactions, one assurance that their interests are protected is to make companies legally liable when they violate regulations.
- CFA Institute Study on Related-Party Transactions (PDF 812k)
- CFA Institute Press Release (PDF 42k)
