What is a related party transaction, and which safeguards are commonly used?

• A. A transaction with a related party; Safeguards include disclosure, independent director approvals, fairness opinions, and audit committee review.
• B. A transaction between unrelated parties; Safeguards include only internal approvals.
• C. A transaction with a government entity; Safeguards include no disclosure.
• D. A transaction that cannot be reviewed; Safeguards include secrecy.

Answer: (A)

A related party transaction is a deal between a company and a person or entity that has a close relationship with the company, such as a director, officer, family member of an officer, or an affiliated entity. Because such relationships can create conflicts of interest or incentives to favor the related party, governance practices require safeguards to protect shareholders and maintain fair dealing.

The safeguards typically used include full disclosure of the transaction to the board and, when appropriate, to shareholders; approval by independent directors who do not stand to benefit from the deal; an independent fairness opinion assessing whether the terms are fair; and review by the audit or another independent committee to oversee the process and ensure terms are at arm’s length. Additional measures can include recusal of the interested party from decisions and, in some cases, external audits or third-party evaluations.

The other description—transactions only between unrelated parties, or involving a government entity with no disclosure, or assuming secrecy—does not align with how related party transactions are governed in practice, since governance emphasizes disclosure, independent review, and fairness.