Related Party Transactions: UK Model

Abstract

This paper analyses the regulation of related party transactions in the UK through two comparative lenses, one external, the other internal. The external comparison is between English law and the law on RPTs in the United States, especially in Delaware. The internal comparison is between the English corporate law applying to all companies and the additional rules applicable to companies quoted on the London Stock Exchange, both those with a premium listing on the Main Market and those traded on the Alternative Investment Market. The first external comparison highlights two features of the general regulation of RPTs in the UK. The first is the adherence of English law to the classical concept of a fiduciary and the second is reluctance to use assessment of the substantive fairness of the transaction as a test for the legality of the RPT and, in consequence, its reliance on wholly procedural controls. The first feature made it difficult for the general law to handle RPTs with shareholders, including directors in their capacity as shareholders. The second came into prominence when the private-ordering model which underlies UK company law led to the shift of the procedural controls from the shareholders to the board. For both problems, UK statute law developed some work-arounds, but without comprehensive revision of these underlying characteristics of the general law. The comparison with the rules for publicly traded companies shows how rules might develop when the starting point is a functional one. Substantial shareholders are as much subject to the constraints as directors and fairness opinions are routinely utilised. However, exchanges have become subject to much sharper regulatory competition than national legal systems. Rule-makers are cautious in their use of exchange rules to promote corporate governance objectives which go beyond what is internationally acceptable. As early as 1993 the London Stock Exchange seems to have pulled back from a widespread application of majority-of-the-minority shareholder approval for RPTs and this century it has wavered in its policies towards subjecting controlling shareholders to effective constraints on RPTs.

Keywords: corporate governance, related party transactions, fiduciary duties, stock exchange rules, controlling shareholders

JEL Classification: K15, K22