How to Read Related Party Transaction Disclosures

Related party transactions (RPTs) are deals between a company and its insiders—executives, directors, major shareholders, or their other businesses. Because these parties aren’t independent, the terms can be unfair to outside investors. Reading the RPT disclosure in a 10-K, 20-F, or proxy statement tells you who’s connected to whom, what they’re buying or selling, and whether the deal passes the “arm’s length” test. This guide walks you through the exact sections to find, the numbers to check, and the red flags that warrant a closer look.

What You’ll Need

• The company’s most recent annual report (10-K for US filers) or proxy statement (DEF 14A) from SEC EDGAR or the company’s investor relations page.
• A PDF viewer with search (Ctrl+F or Cmd+F) to jump to keywords.
• Optional: the prior year’s filing to compare changes.

Step-by-Step

1. Open the filing and search for “Related Party” — In a 10-K, the section is usually under Item 13, “Certain Relationships, Related Transactions, and Director Independence.” In a proxy, it’s often titled “Certain Relationships and Related Transactions.” If you’re reading a foreign private issuer’s 20-F, look for Item 7.B. Use the search function to find every occurrence, because some deals appear in footnotes or the compensation discussion.
2. Identify who counts as a related party — The disclosure will name directors, executive officers, nominees, and shareholders owning more than 5% of the company. It also includes their immediate family members and entities they control (e.g., a director’s real estate firm). Make a list of these names—you’ll need them to cross-check other parts of the filing.
3. Read the description of each transaction — For each deal, the filing should state the parties, the relationship, the date, the purpose, and the key terms. Ask: What is being exchanged? Is it a loan, a lease, a service contract, a sale of assets, or a guarantee? The description will often say “the terms were no less favorable than those available from unaffiliated third parties”—that’s the standard line, but you need to verify it with the numbers.
4. Find the dollar amounts and compare to the threshold — The SEC requires disclosure of any transaction exceeding $120,000 in which a related party had a material interest. Look for the exact amounts paid or received. If the filing only says “over $120,000,” that’s a red flag—it’s vague and may hide a much larger figure. Compare the amount to the company’s total revenue or assets to gauge materiality.
5. Check for a written policy and approval process — Most companies have a Related Party Transaction Policy. The disclosure should say whether the audit committee or a special committee reviewed and approved the deal. If the policy is described, note whether it requires disinterested director approval and whether the transaction was “pre-approved” or “ratified” after the fact. Ratification after the fact is weaker than prior approval.
6. Look for the word “arm’s length” or “market terms” — These phrases are the company’s claim that the deal is fair. But don’t stop there. Ask: Is there independent evidence? For example, if the company leases office space from the CEO’s LLC, does the filing mention comparable rental rates? If it says “based on an independent appraisal,” that’s better than “as determined by management.”
7. Cross-reference with the compensation tables — Some RPTs are actually compensation in disguise. For instance, a low-interest loan to an executive might not appear in the salary table but must be disclosed as an RPT. Check the proxy’s compensation tables and footnotes to see if the loan is listed there too. If it’s only in the RPT section, it may be a below-market benefit.
8. Compare to the prior year’s filing — Open last year’s 10-K or proxy and search for the same parties. Did a transaction that was “terminated” reappear? Did the dollar amount jump without explanation? A sudden increase in fees paid to a related party’s company could signal a sweetheart deal that grew.
9. Note any transactions that are “currently proposed” — The disclosure often includes future or ongoing deals, like a multi-year consulting contract. For these, check the term length and renewal clauses. A perpetual contract with no termination date is a concern because it locks the company into a related party indefinitely.
10. Summarize your findings — Write down the parties, the nature of the deal, the amount, the approval process, and your assessment of fairness. This summary is what you’ll use to compare against industry norms or to ask questions at the annual meeting.

Common Mistakes

• Only reading the RPT section — RPTs can hide in lease footnotes, debt covenants, or the “Other” category of executive compensation. Search the entire document.
• Ignoring the 5% shareholder threshold — A director’s cousin who owns 4.9% isn’t a related party by SEC rules, but could still influence the deal. The disclosure won’t cover them; you’d need to look at beneficial ownership tables.
• Assuming “no less favorable” means fair — That phrase is boilerplate. It doesn’t prove the deal is fair; it’s a legal assertion. Look for actual evidence like appraisals, bids, or market comparables.
• Mixing up the reporting currency — Foreign issuers may report in their local currency. A $120,000 threshold is in US dollars, so a deal in euros may need conversion to check if it’s disclosable.
• Not checking the proxy if the 10-K says “see proxy” — Many 10-Ks incorporate the RPT disclosure by reference to the proxy statement. If you don’t open the proxy, you’ll miss the details.

Tips

• Use EDGAR’s full-text search — On SEC EDGAR, you can search for “related party” within a company’s filings. This catches RPTs in 8-Ks or registration statements that might not be in the annual report.
• Focus on the audit committee’s role — The audit committee is responsible for reviewing RPTs. If the filing says the committee “reviewed and approved” the deal, that’s a positive sign. If it says “was informed” or “ratified,” that’s weaker.
• Look for the dollar amount per year — A transaction might be disclosed as a total over its life, but the annual amount could be small. Convert to an annual figure to compare with the company’s revenue.
• Check the footnotes to the financial statements — Sometimes RPTs are disclosed in the notes as “related party balances” even if they didn’t meet the threshold for the item 13 section. Search for “related party” in the notes too.
• Keep a list of related party names — When you read the compensation section, cross-check names. A director’s spouse’s company might appear as a vendor in the “procurement” footnote.

Troubleshooting

• You can’t find the RPT section — In some filings, especially smaller companies, the disclosure is in the “Corporate Governance” section or the “Certain Relationships” part of the proxy. If your search for “related party” returns nothing, try “transactions with management” or “interests of management.”
• The filing says “not applicable” — That’s possible if the company had no RPTs above the threshold. But double-check: a company with a CEO who owns a private jet company and leases jets to the company would likely have a disclosure. If it says N/A, verify by searching for the CEO’s name in the entire document.
• The amounts are redacted — Sometimes companies redact confidential terms under a confidential treatment order. If you see [***] in the filing, you can request the unredacted version from the SEC, but it may take weeks. In the meantime, look at the description to understand the nature of the deal.
• The transaction is described in vague terms — If the filing says “the company purchased services from a company owned by the CFO’s brother” without naming the entity or the amount, that’s a red flag. You can search SEC EDGAR for the CFO’s name to see if they’ve disclosed the entity in other filings.
• You’re reading a foreign issuer’s 20-F — The rules are similar but not identical. The threshold is still $120,000, but the section may be under “Related Party Transactions” in Item 7.B. Also, some foreign issuers use IFRS, which has its own related party disclosure rules under IAS 24. The concepts are the same, but the format may differ.

Frequently Asked Questions

What is the $120,000 threshold?

The SEC requires disclosure of any transaction involving a related party where the amount exceeds $120,000 in a single year and the related party had a material interest. This is a minimum; many companies disclose smaller transactions voluntarily.

Are all related party transactions bad?

No. Many are legitimate and even beneficial, such as a company renting office space from a founder at market rates. The concern is when the terms are unfair to outside shareholders. Your job is to assess fairness, not to assume wrongdoing.

Where do I find the RPT policy?

Most companies include a summary of the policy in the proxy statement under “Corporate Governance” or “Certain Relationships.” The full policy is often posted on the company’s website under “Governance.”

What if the transaction is with a director’s other company, but the director abstained from the vote?

That’s a good sign—it shows the board recognized the conflict. But check the description: did the abstaining director still receive a benefit? If they abstained but their company got the contract, the abstention is meaningless.

Can I compare RPTs across companies?

Yes, but carefully. Different industries have different norms. For example, real estate companies often have leases with related parties. Compare the terms (rent per square foot, interest rate) to market benchmarks, not just the existence of the RPT.

What’s the difference between a related party and a related person?

In SEC rules, they’re essentially the same. The term “related person” includes directors, executive officers, nominees, 5% shareholders, and their immediate family members. “Related party” is a broader accounting term under GAAP that also includes affiliates and joint ventures. For reading filings, focus on the SEC definition.

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