What Related-Party Transactions Need Independent Review?
Short answer. Have an independent reviewer assess transactions that could personally benefit an owner, family member, manager, or connected entity. Common examples include leases, loans, purchases, sales, compensation, and services between the company and a related party. Disclose the interest, compare the terms, document approval, and talk with your attorney about applicable requirements.
Any transaction that could give an owner, family member, manager, or connected entity a personal benefit calls for a conflict check, and many call for independent review. Review whether the deal serves the business on fair terms and meets its needs. A consistent process can protect the company and family relationships.
Identify Transactions That Need Review
Review transactions between the business and a person or entity connected to an owner, director, or manager. Examples include leasing family-owned property, lending company funds to an owner, buying from a relative's supplier, selling company assets to a family member, or purchasing services from an executive-owned business. Compensation and benefits may also need review if the recipient influences the decision.
Include indirect connections in the policy. A transaction may involve an affiliate, a spouse, a trust, or another entity in which someone connected to the company has an interest. Ask participants to disclose these connections before negotiations or approval. Talk with your attorney about defining related parties in company policies and agreements.
Decide Who Reviews the Transaction
The person who could benefit should not be the only reviewer or approver. An independent director or committee can examine the proposal. If the company lacks those resources, seek outside advice from a qualified professional who has no involvement in the transaction. Give the reviewer enough time and information to form an independent view.
Compare the proposed price and payment terms with available alternatives, and assess the risks. For a lease, consider comparable space and obligations. For a service agreement, review the expected scope and cost, then assess quality. Consider the company's business need and whether the terms make sense for it. The related party's willingness to accept the terms does not settle that question.
Record the Decision and Any Safeguards
Keep the disclosure, materials reviewed, reviewers, and approval in the company's records. Document why the transaction was approved or rejected, along with any conditions, monitoring, or renewal review. If an interested person provides information, record how the decision was made and ensure it did not rest solely on that person's judgment.
Set a schedule to review ongoing arrangements. A contract that was fair when signed may no longer fit as the business changes. Run the conflict check again if terms are renewed or materially changed. Accurate records help the board and owners understand the company's obligations.
Apply One Process Consistently
Use the same disclosure and review rules for transactions involving founders, other family owners, or nonfamily managers. Uneven treatment can raise suspicion even when a deal makes business sense. A policy tied to board procedures gives everyone a clear way to raise concerns and helps reviewers focus on the facts.
For related guidance, read about handling owner and manager conflicts, recording approvals, and information owners need before board meetings. Your attorney can advise on legal requirements, and your CPA can help with financial reporting or tax questions.
At the very least, an independent CPA that is not a family member should be doing a reasonability check.
Sources: The Single Family Office. Informational only, not financial, legal or tax advice.