Related-Party Transaction
A business deal between a company and an insider — such as an executive, director, or major shareholder — creating potential conflicts of interest.
What is Related-Party Transaction?
A related-party transaction (RPT) is any business arrangement between a company and a related party, including major shareholders, directors, officers, or entities in which they have a significant interest. Common examples include loans to executives, asset transfers between a parent and a subsidiary, contracts awarded to businesses owned by directors, and acquisitions from controlling shareholders. RPTs create potential conflicts of interest because the insider may benefit at the expense of minority shareholders. SEC Regulation S-K Item 404 requires public companies to disclose material RPTs in proxy statements and annual filings, and boards typically require independent committee approval for significant related-party dealings.
Example
Tesla has faced repeated scrutiny over related-party transactions involving CEO Elon Musk. In 2022, Musk's other company SpaceX entered into a satellite internet contract with Tesla — a transaction reviewed and approved by Tesla's audit committee of independent directors to ensure arms-length terms and fairness to Tesla shareholders.