Related Party Transactions and Notifiable Transactions

Definition, Approval Procedures, Thresholds, and Disclosure

First: Introduction

Related party transactions (RPTs) are among the most sensitive areas in corporate governance and disclosure. When a listed company transacts with its directors, executives, major shareholders, or their affiliates, conflicts of interest are inherent. Without proper safeguards, RPTs can be used to transfer value from the company (and minority shareholders) to insiders. The Saudi framework — anchored in OSCO, CGR, and the Companies Law — establishes a sophisticated regime for governing RPTs through disclosure, approvals, and oversight.

Beyond RPTs specifically, OSCO also defines “notifiable transactions” — significant transactions that require disclosure regardless of related party involvement. These include major acquisitions, disposals, and other material transactions. This article examines the full framework: who is a related party, what is an RPT, what approvals are required at different thresholds, how RPTs must be disclosed, and what additional rules apply to notifiable transactions. Understanding this framework is essential for protecting against value extraction and maintaining market trust.

💡  Key Insight Related party transactions are not inherently bad — many are routine and beneficial. The issue is the conflict of interest: insiders deciding on transactions with their own related parties. The framework’s purpose is not to prohibit these transactions but to ensure they are conducted on fair terms, with proper oversight, and full transparency. When this works well, the market trusts that even RPTs are managed in the company’s interest.

Second: Defining Related Parties

1. Statutory Categories

1.1 Board Members

• Current board members.
• And in some cases, recent former members.
• All directors regardless of role.
• Including independent directors.

1.2 Senior Executives

• CEO.
• CFO.
• Other senior executives.
• As defined in CGR.

1.3 Major Shareholders

• 5% or more ownership.
• Direct or indirect.
• Or significant influence.

1.4 First-Degree Relatives

• Spouse, parents, children, siblings.
• Of statutory insiders.
• Wider in some contexts.
• Per Companies Law and CGR.

2. Entity Categories

2.1 Companies They Control

• Where statutory insider has control.
• Direct or indirect.
• Majority ownership.
• Or otherwise controlled.

2.2 Companies They Significantly Influence

• Where they have significant influence.
• Per accounting standards.
• Generally 20-50% ownership.
• Or board representation.

2.3 Subsidiaries

• Of the listed company.
• Transactions with subsidiaries.
• Generally not RPTs.
• But certain rules apply.

3. Definition Expansion

3.1 Recent Amendments

• CGR 2021 amendments expanded relatives.
• OSCO 2023-2024 refinements.
• Increasing scope.
• Trend toward broader coverage.

3.2 IFRS Definition

• Per IAS 24.
• Comprehensive accounting standard.
• Used for financial statement disclosure.
• Generally aligned with regulatory definition.

Third: What Is a Related Party Transaction

1. The Concept

1.1 Basic Definition

A transaction between:

• The listed company (or its subsidiaries).
• And a related party.
• Of any economic significance.

1.2 Coverage

• Sales/purchases of goods.
• Sales/purchases of assets.
• Services.
• Lending/borrowing.
• Leases.
• Guarantees.
• Compensation arrangements.

2. Common Types

2.1 Goods and Services

• Buying from related party suppliers.
• Selling to related party customers.
• Outsourcing to related parties.
• Various service arrangements.

2.2 Real Estate

• Renting from/to related parties.
• Buying property from/to related parties.
• Common in family-influenced companies.

2.3 Financing

• Loans to/from related parties.
• Guarantees.
• Securing related party debt.

2.4 Compensation

• Executive compensation.
• Special arrangements.
• Beyond normal employment.

3. Excluded Transactions

3.1 Ordinary Course of Business

• Routine transactions.
• At market terms.
• Limited disclosure.
• Per OSCO criteria.

3.2 De Minimis

• Very small transactions.
• Below thresholds.
• Simplified treatment.

Fourth: Approval Framework

1. Tiered Approvals

1.1 Audit Committee Review

Per CGR:

• First-level review for all RPTs.
• Assessment of fairness.
• Comparison with market terms.
• Recommendation to Board.

1.2 Board Approval

For substantive RPTs:

• After Audit Committee recommendation.
• Without participation of interested member.
• Documented decision.
• Reasoned approval.

1.3 General Assembly Approval

For material RPTs:

• Above specified thresholds.
• Without voting of interested shareholder.
• By majority of disinterested shareholders.
• Significant transactions.

2. Thresholds

2.1 OSCO Thresholds

Approximate thresholds (subject to amendments):

Transaction Size	Approval Level
Ordinary course at market terms	Internal procedures
Above SAR 1 million (or thresholds)	Audit Committee + Disclosure
Above SAR 10 million (or thresholds)	Board approval + Immediate disclosure
Material (above thresholds)	General Assembly approval

2.2 Specific Rules

• Vary by transaction type.
• Vary with related party type.
• Specific to circumstances.
• Legal counsel advisable.

3. Approval Procedures

3.1 Identification

• Recognizing the transaction as RPT.
• Identifying related parties involved.
• Through company procedures.

3.2 Initial Review

• By management.
• With legal counsel.
• Initial assessment.
• Recommendation.

3.3 Audit Committee

• Detailed review.
• Independent assessment.
• External advice if needed.
• Recommendation to Board.

3.4 Board

• Final approval (within authority).
• Without interested member.
• Documented vote.
• Records maintained.

3.5 Assembly (if required)

• Disclosed in invitation.
• Detailed information.
• Vote without interested shareholder.
• Documented.

Fifth: Pricing and Terms

1. Fairness Standard

1.1 Market Terms

RPTs should be:

• At terms comparable to arm’s-length.
• Market pricing.
• Standard contractual terms.
• Or favorable to the company.

1.2 Evidence

• Market comparisons.
• Independent valuations.
• Bidding/quotation processes.
• Expert opinions.

2. Independent Valuation

2.1 When Required

• Large transactions.
• Unique assets.
• No clear market comparison.
• Strategic transactions.

2.2 Valuators

• Licensed and qualified.
• Independent of parties.
• With relevant expertise.
• Reputation.

3. Documentation

3.1 What to Document

• Why this related party.
• Why these terms.
• Comparison with alternatives.
• Approvals obtained.

3.2 Why Important

• Defense if challenged.
• Audit trail.
• Institutional memory.
• Regulatory compliance.

📌  Note The fairness standard is not just about price. It includes all terms — payment terms, delivery, quality, support, exclusivity, duration, etc. A related party may quote market price but with unusually favorable terms (extended payment, no quality guarantees, etc.). A complete fairness analysis examines all terms collectively.

Sixth: Disclosure Requirements

1. Immediate Disclosure

1.1 When Required

For material RPTs:

• Through IFSAH.
• Promptly after Board approval.
• Or sooner if material to market.

1.2 Content

• Description of transaction.
• Related party identification.
• Nature of relationship.
• Value of transaction.
• Terms (key terms).
• Approvals obtained.
• Reasons for transaction.

2. Disclosure for Assembly Approval

2.1 Assembly Notice

• In invitation to Assembly.
• 21 days before.
• With detailed information.
• For informed voting.

2.2 Content

• Transaction details.
• Related parties.
• Why submitting to Assembly.
• Audit Committee recommendation.
• Board recommendation.
• Independent valuation (if any).

3. Annual Disclosure

3.1 In Annual Report

Per CGR Article 90:

• All RPTs during the year.
• Aggregated by related party.
• With values.
• With descriptions.

3.2 In Financial Statements

Per IAS 24:

• Disclosure of related parties.
• Of all transactions.
• Of all balances.
• Of compensation.

Seventh: Notifiable Transactions

1. The Concept

1.1 Definition

Per OSCO:

• Significant transactions.
• Above specified thresholds.
• Regardless of related party involvement.
• With special disclosure requirements.

1.2 Categories

• Acquisitions of assets.
• Disposals of assets.
• Investments.
• Major contracts.

2. Thresholds

2.1 Class Tests

Multiple thresholds applied:

• Percentage of company assets.
• Percentage of revenue.
• Percentage of profits.
• Percentage of consideration.

2.2 Classification

2.3 Class 1 (Smaller)

• Lower thresholds.
• Immediate disclosure required.
• Limited additional requirements.

2.4 Class 2 (Larger)

• Higher thresholds.
• More extensive disclosure.
• Possibly Assembly approval.

2.5 Reverse Takeovers

• Where target dwarfs acquirer.
• Special requirements.
• Essentially a new listing.
• Comprehensive disclosure.

3. Disclosure Requirements

3.1 Immediate

• Through IFSAH.
• On signing or material development.
• With key terms.

3.2 Detailed

• Circular for larger transactions.
• Information to shareholders.
• Financial analysis.
• Strategic rationale.

3.3 Ongoing

• Updates as transaction progresses.
• Closing announcements.
• Post-closing developments.

Eighth: Special Cases

1. Family Companies

1.1 Common Issues

• Many family relationships.
• Many related parties.
• Many potential RPTs.
• Complex structures.

1.2 Best Practices

• Robust identification systems.
• Conservative interpretation.
• Strong governance.
• Transparent disclosure.

2. Group Companies

2.1 Subsidiary Transactions

• Generally not RPTs (within group).
• But various rules apply.
• Consolidation considerations.
• Transfer pricing.

2.2 Sister Companies

• Common controlling shareholder.
• Transactions between sister companies.
• May be RPTs.
• Through common controller.

3. Major Shareholders

3.1 With Major Shareholder

• Direct transactions with 5%+ shareholders.
• Generally RPTs.
• Special scrutiny.

3.2 With Major Shareholder’s Affiliates

• Through their controlled entities.
• Through their significant influence entities.
• RPTs.

4. Compensation Arrangements

4.1 Executive Compensation

• Normal compensation often excluded.
• Special arrangements may be RPTs.
• Disclosed annually.
• Per CGR requirements.

4.2 Director Remuneration

• Approved by Assembly.
• With limits.
• Disclosed in detail.

Ninth: Audit and Verification

1. External Auditor

1.1 Role

• Identifies RPTs during audit.
• Tests fairness.
• Verifies disclosure.
• Reports issues.

1.2 Procedures

• Inquiry of management.
• Review of contracts.
• Confirmation procedures.
• Substantive testing.

2. Internal Audit

2.1 Role

• Periodic reviews.
• Compliance with policies.
• Approval procedures.
• Reporting to Audit Committee.

2.2 Scope

• RPT identification.
• Approval documentation.
• Pricing verification.
• Disclosure consistency.

3. Audit Committee Oversight

3.1 Continuous

• Regular reviews of RPTs.
• Trends and patterns.
• Policies and procedures.
• Improvements.

3.2 Reporting

• To Board.
• Annual review.
• Recommendations.
• Special concerns.

Tenth: Common Pitfalls

1. Failure to Identify RPTs

1.1 Causes

• Complex relationship structures.
• Lack of awareness.
• Process gaps.
• Family complexity.

1.2 Prevention

• Comprehensive related party database.
• Regular updates.
• Training of personnel.
• Robust identification procedures.

2. Unfair Pricing

2.1 Issue

• Terms favoring related party.
• Above-market pricing for purchases.
• Below-market for sales.
• Wealth transfer.

2.2 Prevention

• Market comparisons.
• Independent valuations.
• Audit Committee scrutiny.
• Documentation.

3. Inadequate Approvals

3.1 Issue

• Skipping Audit Committee.
• Interested member voting.
• Insufficient documentation.
• Process shortcuts.

3.2 Prevention

• Strict procedures.
• Documentation requirements.
• Periodic audits.
• Training.

4. Late or Insufficient Disclosure

4.1 Issue

• Disclosure delayed.
• Disclosure incomplete.
• Missing key terms.
• Hidden in annual report.

4.2 Prevention

• Disclosure checklists.
• Multi-party review.
• Templates.
• Consistency.

Eleventh: Best Practices

1. Identification

• Comprehensive database: of related parties.
• Regular updates: as relationships change.
• Sources: board declarations, shareholder data, organizational charts.
• Training: of relevant personnel.

2. Approval

• Clear procedures: for each threshold.
• Audit Committee discipline: rigorous review.
• Board decisions: without interested members.
• Documentation: comprehensive.

3. Fairness

• Market comparison: always.
• Independent valuation: for material.
• Multiple proposals: when feasible.
• Senior review: of pricing.

4. Disclosure

• Immediate: for material RPTs.
• Annual: comprehensive listing.
• IAS 24: in financial statements.
• Quality: complete and clear.

Conclusion

Related party transactions sit at the intersection of governance, disclosure, and conflict of interest. The Saudi framework provides comprehensive protection through multi-level approvals, fairness requirements, and detailed disclosure obligations. When applied diligently, the framework allows beneficial RPTs to proceed while protecting the company and minority shareholders from value extraction.

Companies that excel in RPT management share common characteristics: strong identification systems, rigorous fairness analysis, robust approval procedures, comprehensive disclosure, and strong audit committee oversight. These companies treat RPTs not as inconvenient regulatory burdens but as critical governance moments. As the Saudi market continues to mature, with increased institutional and foreign investment, the quality of RPT management becomes increasingly visible and valued. Strong RPT discipline is a hallmark of well-governed companies.

🎯  Essential Points to Remember (1) Related parties include board, senior executives, major shareholders, first-degree relatives, and their controlled entities. (2) RPTs cover all transactions: goods, services, real estate, financing, compensation. (3) Tiered approvals: Audit Committee → Board → Assembly (based on thresholds). (4) Interested member/shareholder excluded from voting. (5) Fairness standard: market terms or better for company. (6) Disclosure: immediate (material), Assembly notice, annual report, IAS 24 financial statements. (7) Notifiable transactions: significant transactions regardless of RPT status. (8) External + internal audit verification critical. (9) Common pitfalls: identification failure, unfair pricing, inadequate approvals, late disclosure. (10) Best practices: robust systems, rigorous review, comprehensive documentation.

Contact Us

FAQS

Are related party transactions prohibited under Saudi regulations?

No, related party transactions are not inherently prohibited — many are routine and beneficial. The framework's purpose is to ensure they are conducted on fair market terms, with appropriate oversight and full transparency, protecting minority shareholders from value extraction by insiders while allowing legitimate business dealings to proceed.

Related parties include current board members, senior executives (CEO, CFO, and other senior officers), major shareholders owning 5% or more, first-degree relatives (spouse, parents, children, siblings) of any of the above, and entities controlled or significantly influenced by any of these individuals.

References and Sources

• OSCO Rules — Related Party and Notifiable Transactions.
• Corporate Governance Regulations — Article 90 and RPT provisions.
• Saudi Companies Law (M/132).
• IAS 24 — Related Party Disclosures.
• Tadawul Listing Rules.
• Audit Committee Charters and Guidelines.
• OECD Related Party Transactions Guide.
• IFC Related Party Transactions in Emerging Markets.
• UK FCA — Class Tests and Related Party Rules (reference).
• PwC, KPMG, EY, Deloitte — RPT Compliance Guides.