Post by oldman on Oct 19, 2013 8:38:28 GMT 7
Like most things in life, interested party transactions may not be that simple.
If company A deals with company B and a director owns shares in both companies A and B, it is straightforward that the director has to declare an interested party transaction for both companies, if they both buy or sell products amongst themselves.
However, the situation becomes more complicated if there is a third company in the equation. Company A buys from Company B but in this case, the director only owns shares in Company A. However, the director also owns shares in Company C which then trades wtih Company B.
In some cases, Company A may sell products cheaply to Company B and may in fact make a loss on the transaction. Company B then sells the product to company C cheaply as well resulting in Company C being the main benefactor of the series of transactions.
Yes, there are a lot of permutations in between but the key issue is that company transactions may not be that clear cut. Of course, an even simplier way is to get Company B pay the director a cut, but this is clearly illegal as this is a form of kickback, bribery or corruption. My understanding is that these permutations do not require the director to declare an interested party transaction. It all boils down to the integrity of the management.
It is very difficult to judge the integrity of a human being. This is why in my book on investment, I place a low priority on management because integrity is very difficult to assess. Regardless, most investment books will tell you that management integrity is one of the most important aspect for investing in any company.... though none of them tell you that it is frankly almost impossible to judge if you are not that person being assessed!