| name | related-party-transaction-policy |
| description | Drafts a board-adoptable Related Party Transaction Policy for U.S. corporations governing identification, Audit Committee review, approval, and disclosure of related party transactions. Enforces SEC Item 404(a)/Regulation S-K compliance and stock exchange listing standards. Use when creating or updating RPT policies for public or private companies, or when drafting corporate governance documents addressing conflicts of interest. |
Related Party Transaction Policy
Drafts a Related Party Transaction Policy with Audit Committee governance, SEC-compliant disclosure, and fiduciary duty safeguards.
Prerequisites
- Company profile — legal name, state of incorporation, public/private status, exchange listing (NYSE/Nasdaq)
- Governance documents — certificate of incorporation, bylaws, Audit Committee charter, Code of Ethics
- Existing RPTs — current or anticipated related party relationships or transactions
- Dollar threshold — internal approval threshold (common: $120K, $250K, or $500K)
Quick Start
- Collect prerequisites above
- Draft policy sections in order below
- Calibrate thresholds — SEC disclosure floor is $120K (Item 404(a) of Reg. S-K); set internal pre-approval trigger at or above that
- Cross-reference Audit Committee charter to avoid conflicting governance authority
- 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
