Which related party transactions should be subject to ex ante review? Evidence from Germany

Abstract

ABSTRACT The amended EU Shareholder Rights Directive introduces a comprehensive regime of ex ante review for potentially conflicted transactions between listed companies and ‘related parties’ (major shareholders, managers, and others). If considered material, these transactions will have to be evaluated in advance by the board of directors, the shareholders' meeting, or the stock market. The most important choice to be made by member states in implementing the directive concerns the definition of ‘materiality’. We use hand-collected data based on IAS 24 reporting of related party transactions to estimate the number of German companies affected by quantitative materiality thresholds based on accounting assets, sales, market capitalisation, and other financials. One important recommendation derived from the analysis is to use more than one single quantitative test to define material related party transactions.