Related party transactions and separation between control and direction in business groups: the Italian case

Under IAS 24 a related party transaction (RPT) is a “transfer of resources, services or obligations between related parties, regardless of whether a price is charged” (IASB). The purpose of this paper is to consider the interest of the business group and the directing activity of the parent company for the interpretation of the RPT. Considering the interest of the group means to interpret the intra-group transactions not as isolated transactions, as usually done by the empirical studies, but in a wider perspective, that of the group.

This paper builds on explanatory multiple case studies in order to answer the following research questions: why the interest of the business group and the directing activity of the subsidiaries by the parent company are important in the interpretation of RPTs. How RPTs can be interpreted in the light of the directing activity of the holding company.

Dominant shareholder tends to demonstrate that the group it is not managed as a single economic entity and sometimes that subsidiaries are not really controlled. The case studies show that a regulation that imposes the transparency of the directing activity has at least two effects: the controlling shareholder finds it convenient to delegate the decision-making power and to not carry out RPTs among firms that do not present clear economic links. Thus, the transparency of the directing activity seems to be a disincentive to the establishment of a pyramidal group with expropriation purposes.

It is appropriate that the interpretation of the RPT take into account not only the disclosure of the RPT (e.g. type and nature), but also the following disclosure: the reason and the business purpose that lead to RPT; the interest of the company in engaging such transactions; and the procedures for their approval. The independence of subsidiaries directors is necessary to ensure the management autonomy of the boards, and in the case of directing activity they have to protect outsiders in the case of detrimental transactions ordered by the controlling and directing company that are not carried out in the interest of the group.

Unlike what has been done so far by the literature on RPT, this paper considers the interest of the group to interpret the intra-group transactions and the separation between control and direction. It means do not interpret RPT as isolated transactions, as usually done by the empirical studies, but in a wider perspective, that of the group.