Related person approvals: test policy against the actual decision
A related-person transaction can be disclosed in financial statements while its approval process remains a separate governance question. Compare the company’s stated review policy with the actual decision, including conflicts and any retrospective ratification. The output is an approval-evidence record, not an assumption that disclosure itself proves independent review.
Distinguish governance and accounting definitions
The SEC’s Regulation S-K interpretations discuss related-person transaction disclosures and review-policy requirements, including issuer-specific exceptions. This article concerns relevant US SEC disclosures. IAS 24 accounting disclosures, Hong Kong connected transaction rules and A-share related-party approvals are different regimes and should not be treated as interchangeable.
Identify the person, relationship, transaction, amount and relevant issuer category. Read the policy’s coverage and decision maker. A general ethics code may require conflict disclosure without supplying the same transaction review procedure as an audit-committee policy. Preserve that distinction.
Hypothetical director-linked lease
Suppose a company enters a five-year office lease with an entity owned by a director’s family. Annual rent is 2 million. The company’s published policy requires audit-committee review of covered transactions, and the transaction note says approval occurred after signing because advance review was not practicable.
The evidence supports retrospective ratification if that is what the record says; it does not support saying the deal was preapproved. Nor does the director’s abstention alone prove the rent was commercially fair. The relevant committee may have reviewed comparable locations, lease terms and independent alternatives, but those facts require evidence.
All terms are hypothetical. A 10 million simple sum of annual rent is not necessarily the disclosed amount involved under every rule, nor the accounting lease liability. Use the applicable disclosure instructions and distinguish nominal payments, recognized liability and the company’s transaction-approval threshold.
Copy the approval worksheet
Create fields for related person, relationship evidence, transaction scope, amount definition, policy version, approval body, decision date, conflicted participants, recusal evidence and any exception or ratification. Add the documents supporting commercial terms and the rationale stated by the independent decision makers.
Compare the required process with what is disclosed as having occurred. Mark missing evidence precisely: committee meeting not public, recusal not stated, alternatives not described or approval timing unclear. A blank is not proof that a required step was omitted. It is a limit on independent verification.
Test actual conduct against policy
Observe renewals, amendments, expanded scope and repeated transactions with the same counterparty. An initial approval may not cover a later material change. Check whether the policy requires renewed review and whether the disclosed decision actually addresses that change.
Read financial statement balances alongside the approval record, but do not let a settled receivable answer the governance question. Conversely, a proper approval process does not guarantee the transaction will be profitable. Process evidence, commercial outcomes and accounting recognition are distinct analytical dimensions.
The final memo should state the policy, the supported decision, any disclosed exception and the specific unanswered issue. Avoid asserting that the transaction was illegal or fair merely because an analyst cannot see confidential minutes. Public disclosures can support a useful bounded assessment without resolving every aspect of board deliberation.
FAQ
Does shareholder approval always have to be obtained?
No universal rule applies across markets or transactions. Requirements depend on the issuer, exchange, jurisdiction and transaction. Identify the applicable regime before deciding which approval evidence should exist.
Is ratification equivalent to advance approval?
No. Both may be relevant under a policy, but they describe different timing and control processes. Preserve the actual sequence and examine why the exception was used instead of rewriting it as preapproval.