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IAI Actuarial Core Principles · Business Finance · Ethical responsibilities of owners and managers

The majority shareholder of an Indian company proposes that the company sell a property to a firm owned by the majority shareholder's spouse at a price below an independent valuation. Which view is correct from an ethical standpoint?

The sale is a related-party transaction at an undervalue and creates a conflict of interest. Ethically it should be disclosed, priced fairly against independent valuation, and approved by disinterested parties. Having the votes to pass it does not justify transferring value away from minority shareholders.

  1. AIt is acceptable because the majority shareholder can pass any ordinary resolution
  2. BIt is acceptable provided the sale is completed before the year end
  3. CIt raises a conflict of interest; the transaction should be disclosed and approved by disinterested parties at a fair priceCorrect
  4. DIt is acceptable if the company's auditor is not informed to avoid delay
  5. It is acceptable because shareholders owe no duties to the company

Explanation

This is a related-party transaction at an undervalue, benefiting the controller at the expense of other shareholders. Ethical practice requires disclosure, independent valuation, and approval by disinterested directors or shareholders. Voting power does not make an unfair transfer of value ethical.

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