Related Party Transactions in Commonwealth Asia: Complexity Revealed

NUS Law Working Paper No. 2018/014

NUS Centre for Asian Legal Studies Working Paper 18/03

NUS EW Barker Centre for Law & Business Working Paper 18/02

European Corporate Governance Institute (ECGI) - Law Working Paper No. 404/2018

36 Pages Posted: 27 Apr 2018 Last revised: 5 May 2018

See all articles by Dan W. Puchniak

Dan W. Puchniak

National University of Singapore (NUS) - Faculty of Law

Umakanth Varottil

National University of Singapore (NUS) - Faculty of Law

Date Written: April 27, 2018

Abstract

The World Bank’s influential Doing Business Report (DBR) has been a key platform for the American-driven dissemination of global norms of good corporate governance. A prominent part of the DBR is the related party transactions (RPT) index, which ranks 190 jurisdictions from around the world on the quality of their laws regulating RPTs. According to the RPT Index, the regulation of RPTs in Commonwealth Asia’s most important economies is stellar. In the latest RPT Index, Singapore ranked 1st, Hong Kong 3rd, Malaysia 5th, and India 20th. However, despite the uniformly high RPT Index scores in all of Commonwealth Asia’s most important economies, empirical, case-study, and anecdotal evidence overwhelmingly suggests that there are in practice significant inter-jurisdictional and intra-jurisdictional differences in the actual function and regulation of RPTs in Commonwealth Asia.

In this chapter, we assert that the conspicuous gap between what the RPT Index suggests should be occurring and what is actually occurring in Commonwealth Asia exists because it fails to capture the complexity of RPTs in three respects, which we term: (1) regulatory complexity; (2) shareholder complexity; and, (3) normative complexity. First, it appears that the RPT Index overly emphasizes the role played by a jurisdiction’s formal corporate and securities laws in determining the effectiveness of its RPT regulation, and it fails to pay due regard to its corporate culture and rule of law norms in determining the efficiency of its RPT regulation. Second, the RPT Index erroneously assumes that controlling shareholders are a homogeneous group driven by similar incentives. Third, the general assumption that RPTs per se are evidence of defective corporate governance and that stricter regulation of RPTs consequently equates to “good law” is erroneous.

Demonstrating the frailties of the RPT Index is important in practice because jurisdictions – especially developing ones – commonly look to the DBR and its indices when reforming their laws. In addition, the intellectual foundation of the RPT Index also makes the findings in our chapter academically significant.

Keywords: Comparative corporate law and governance, related party transactions, Commonwealth Asia, World Bank Doing Business Report, legal origins theory

JEL Classification: K22, L22

Suggested Citation

Puchniak, Dan W. and Varottil, Umakanth, Related Party Transactions in Commonwealth Asia: Complexity Revealed (April 27, 2018). NUS Law Working Paper No. 2018/014; NUS EW Barker Centre for Law & Business Working Paper 18/02; European Corporate Governance Institute (ECGI) - Law Working Paper No. 404/2018. Available at SSRN: https://ssrn.com/abstract=3169760 or http://dx.doi.org/10.2139/ssrn.3169760

Dan W. Puchniak (Contact Author)

National University of Singapore (NUS) - Faculty of Law ( email )

469G Bukit Timah Road
Eu Tong Sen Building
Singapore, 259776
Singapore
(65) 6516 3625 (Phone)

HOME PAGE: http://law.nus.edu.sg/about_us/faculty/staff/profileview.asp?UserID=lawdwp

Umakanth Varottil

National University of Singapore (NUS) - Faculty of Law ( email )

469G Bukit Timah Road
Eu Tong Sen Building
Singapore, 259776
Singapore

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