related-party-transaction-policy

# Related Party Transaction Policy

Drafts a Related Party Transaction Policy with Audit Committee governance, SEC-compliant disclosure, and fiduciary duty safeguards.

## Prerequisites

1. **Company profile** — legal name, state of incorporation, public/private status, exchange listing (NYSE/Nasdaq)
2. **Governance documents** — certificate of incorporation, bylaws, Audit Committee charter, Code of Ethics
3. **Existing RPTs** — current or anticipated related party relationships or transactions
4. **Dollar threshold** — internal approval threshold (common: $120K, $250K, or $500K)

## Quick Start

1. Collect prerequisites above
2. Draft policy sections in order below
3. Calibrate thresholds — SEC disclosure floor is $120K (Item 404(a) of Reg. S-K); set internal pre-approval trigger at or above that
4. Cross-reference Audit Committee charter to avoid conflicting governance authority
5. Format as 4–7 page board-adoptable document with signature lines

## Policy Sections

### 1. Header & Purpose

- Title: `[Corporation Legal Name] Related Party Transaction Policy and Procedures`
- Purpose: transparency, conflict prevention, SEC compliance, shareholder protection
- Include effective date, version number, adoption authority (full Board)

### 2. Definitions

| Term | Definition |
|---|---|
| **Related Party** | Directors, executive officers, nominees, >5% beneficial owners of any voting class, and their immediate family members |
| **Immediate Family Member** | Spouse, parents, children, siblings, in-laws, household members (non-tenant/employee) |
| **Related Party Transaction** | Transaction where (a) aggregate amount exceeds threshold, (b) company/subsidiary is participant, (c) Related Party has direct/indirect material interest |
| **Material Interest** | Excludes: director/officer position at the company; <10% ownership of counterparty |

Covered transaction examples: property/service sales, consulting/employment arrangements outside ordinary course, loans/guarantees, charitable contributions where Related Party is officer/director.

### 3. Identification Procedures

- **Individual duty**: Directors and executive officers must disclose potential RPTs to Audit Committee Chair and General Counsel before any binding commitment
- **Institutional controls**: Legal, Finance, and Internal Audit monitor vendor relationships, significant contracts, expense reports, investment activities, charitable contributions
- **Annual questionnaires**: All directors and executive officers disclose related party relationships

### 4. Audit Committee Review & Approval

- **Exclusive authority**: Audit Committee approves; interested parties recuse from deliberation and voting
- **Submission materials**: transaction terms, nature of interest, business purpose, arm's-length comparables, ordinary course analysis
- **Standard**: Committee determines in good faith the transaction is **fair and reasonable** and in the company's and shareholders' best interests
- **Ongoing RPTs**: Annual re-review required; Committee may set standing guidelines for recurring arrangements

### 5. Pre-Approved Categories

| Category | Condition |
|---|---|
| Executive compensation | Board or Compensation Committee approved |
| Director compensation | Full Board approved |
| Non-executive counterparty employee | Related Party holds <10% equity in counterparty |
| Broad-based benefit plans | Same terms for all employees |
| De minimis transactions | Below Audit Committee threshold |

### 6. Disclosure Obligations (Public Companies)

- Disclose RPTs meeting SEC thresholds per **Item 404 of Reg. S-K** in proxy statements, 10-K, 10-Q, 8-K
- General Counsel and CFO own accuracy, completeness, and timeliness
- Audit Committee reviews RPT disclosures before SEC filing inclusion
- Consider full Board reporting regardless of public disclosure requirement

### 7. Administration & Enforcement

| Topic | Provision |
|---|---|
| Administrator | Audit Committee |
| Annual review | Committee reassesses; recommends amendments to Board |
| Material amendments | Require Board approval; disclose per law and exchange rules |
| Non-compliance | Disciplinary action up to termination; rescission, modification, or ratification of unapproved transactions; disgorgement of profits |

### 8. Formatting

- Numbered sections with descriptive headings
- Page headers: company name + policy title; footers: page numbers
- Signature lines for Audit Committee Chair and Corporate Secretary
- Cross-references to Audit Committee charter, Code of Ethics, Corporate Governance Guidelines

## Pitfalls & Checks

- **Public vs. private**: SEC disclosure (Item 404, Reg. S-K) applies only to reporting companies; private companies tailor disclosure but still need substantive approval procedures
- **Exchange rules**: Nasdaq Rule 5630 and NYSE Manual §314 impose independent director approval — verify current rule numbers against exchange manuals
- **State law**: Delaware entire fairness standard may apply if approval procedures are not followed; most states impose similar fiduciary overlay
- **Definition scope**: Consider extending Related Party to entities where covered persons hold ≥10% equity or serve as executive officer/general partner
- **Ratification**: Address whether Audit Committee can ratify transactions entered without prior approval, and under what conditions
- **Charter consistency**: Policy terminology and authority must not conflict with existing Audit Committee charter