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Europe Needs Tougher Related-Party Rules

Neil Baker | March 15, 2011

The European Commission should introduce new rules forcing companies to disclose more information about related-party transactions, according to a body that advises it on corporate governance issues.

The European Corporate Governance Forum called for tougher guidelines on the size of transaction that a company must disclose to its shareholders and new rules on when directors should seek shareholder approval for a deal.

The Commission has promised to look at Europe's current rules on related-party transactions, in which a company buys or sells assets to or from a connected business or individual, when it issues a Green Paper on corporate governance, which is due in a few weeks.

The Forum said shareholders need extra protection from related-party deals, especially when control of a company or its board resides with a single party.

It said a company should have to win shareholder approval if it wants to sell more than five percent of its assets to a related party, with the party in question banned from voting.

Deals worth between one percent and five percent of assets should be publicly announced and accompanied by a letter from an independent director confirming that the transaction is “fair and reasonable” for outside shareholders.