The Duties of Significant Shareholders in Transactions with the Company

Abstract

According to accounting rules, companies must provide a (financial) summarized overview of related party transactions, among which are transactions with shareholders. This study of the Euro STOXX small 200 shows that transactions with large shareholders are common and a significant number of these transactions are material compared to the size of the company. Unfortunately, the reporting standards are not in accordance with the information that is necessary to assess whether the potential conflicts of interests are mitigated. In its proposal to revise the shareholder rights directive, the European Commission provides – in its current 2015 version - in a process of disclosure of the transaction, the assessment of the fairness of the transaction for the company and its minority shareholders by an independent body and an approval by the (supervisory) board and/or the shareholders. However, the proposal will more than likely not overcome the major concerns of the capital market regarding conflicts of interest within companies.

I suggest involving the external auditor and the audit committee. The external auditor’s duties already include the control over the related party transactions. Consequently, these duties can be broadened as to include the reasonable assurance that the envisaged related party transactions are economic fair transactions. Further the audit committee must be established in public interest entities with a duty to monitor i.a. the performance of the work of the auditor. Consequently it can include the work of the auditor regarding related party transactions. The audit committee can serve as the body that approves the related party transaction. This procedure can help to mitigate the conflicts of interests in related party transactions.

Keywords: Shareholder transactions, duties

JEL Classification: K22