Arm's length
ESG & GovernanceA deal made on the same terms that two unrelated parties would agree to in the open market.
Related-party deals are supposed to be at arm's length: prices, credit terms and conditions should match what an outsider would get. Under Section 188, deals that are not at arm's length or not in the ordinary course of business need board, and sometimes shareholder, approval. Companies often state that all RPTs are at arm's length. Test the claim by comparing royalty rates, rents, margins and credit periods with peers and market rates.
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