In corporate law, related party transactions are deals between a company and people who are closely connected to it — directors, major shareholders, or their relatives and entities they control. These transactions are not automatically illegal, but they are risky because of built-in conflict of interest.
Without safeguards, insiders could use company resources for personal gain: inflated contracts to a relative’s firm, discounted assets sold to a director, or loans on generous terms. To prevent this, company law generally requires special approvals, disclosures and, in some cases, restrictions.
Boards must record such transactions properly and independent directors are often expected to scrutinise them. Shareholder approval may be needed above certain thresholds. Listed companies also face additional compliance and reporting requirements.
For investors and minority shareholders, this framework is a key protection. When reading annual reports or financial statements, related party disclosures give clues about how clean or risky the governance culture is. Where rules are ignored or transactions are opaque, regulators and courts can step in, impose penalties, or even unwind suspect deals.