Scrutinizing Related Party Contracts in M&A Due Diligence: Essential Guide

Navigating the complexities of related party contracts during M&A transactions? Our comprehensive guide helps you identify, analyze, and evaluate these critical agreements. Learn why related party contracts are considered material and how they impact deal valuation, regulatory compliance, and post-acquisition strategies. Discover key factors to assess, including transfer pricing, arm's length terms, and potential conflicts of interest. Essential reading for M&A lawyers, financial analysts, and corporate governance professionals involved in mergers, acquisitions, and corporate restructurings. Uncover hidden risks and opportunities in related party transactions with our expert insights and due diligence best practices.

Understand who are related parties

1. Identify related party contracts. Confirm the relationship between the parties.

2. Review the related party contract.

3. Determine whether it was entered into on arm’s length terms.

4. Determine whether the contract will continue beyond completion of the transaction.

Who are related parties?

Below are examples of parties that are related.

1. An entity that controls a company is related to that company

2. If 2 or more entities are both controlled by the same holding company, then those entities are related

3. A director of a company is related to that company

4. Spouse and children of the Company Director are related to Company

5. Directors of an entity that controls the company are related to that company

6. Spouse and children of a Director of an entity that controls the company are related to that Company

Are there any related party contracts?

Identify related party contracts by:

• Asking the Seller for a list of related party contracts

• Asking during the RFI/Q&A process

• Confirming by looking at public records or online.

Once you have a list, confirm the relationship of the parties.

Review the related party contract

Review the contract to determine whether it was entered into on arm’s length terms. Examples of things to look for:

• Standard T&C’s

• Advice sought

• Written contract

• Market rates

• Signed contract

• Negotiated terms

• Undue influence

Ask whether the contract will continue after completion

Determine whether the parties want the contract to continue after the transaction is completed.

• Ask the Seller via RFI/Q&A

• Parties must be willing to uphold obligations

• Consider if the contract is beneficial