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