September 19, 2023

Related Party Transactions: What Does it Mean to “Participate” in One?

The SEC’s position in this enforcement action makes it clear that Lyft’s involvement in approving and negotiating some of the terms of the transaction was sufficient to characterize the company as a “participant” in it. This excerpt from p. 21 of our “Related Party Transactions Disclosure Handbook” provides additional color on the participation concept & some of the challenges it presents:

Being a participant encompasses situations where the company benefits from a transaction but is not technically a contractual party to the transaction. In response to concerns that the concept of a “participant” might be too broad and far-reaching, the SEC offered the following example of a case where disclosure might be required even if the company is not a contractual party: “[d]isclosure would be required if a company benefits from a transaction with a related person that the company has arranged and in which it participates, notwithstanding the fact that it is not a party to the contract.” See the 2006 Adopting Release at footnote 418.

This loose boundary may be problematic to monitor since it carries with it the possibility that disclosure could be required in a situation where the company does not have a “material interest” (as would be required for the related person) in the transaction. Presumably, the company would be aware of the transaction if it had a hand in “arranging” the transaction, but there may be other situations that are not as evident to those tasked with tracking potentially disclosable transactions.

We also have a bunch of Q&As beginning on p. 48 of the Handbook that address specific situations where “participation” is an issue that you may find helpful. The bottom line is that Item 404 of Reg S-K is designed to cast a very wide net, and the SEC expects companies to be mindful of that fact when preparing disclosure documents. In her blog last week, Meredith suggested that it may be time for companies to consider refreshing their disclosure controls and procedures for related party transactions.  That seems like an even better idea this week.

John Jenkins