New Related-Party Transaction Rules: More Security For Real Estate Transfers, Or Not?

Since their inception in 1996, related-party transaction requirements have often proven to be a headache for investors (and a favourite due diligence finding for lawyers). The rules set out in Section 196a of the Commercial Code are designed to avoid the abuse of companies by the entities/individuals that control them. In a related-party transaction, the price for any transfer of assets that amount to over one-tenth of a company's registered capital must be determined by a court appointed expert. The Supreme Court has repeatedly and consistently ruled (i) that the expert valuation must be made prior to the contract, (ii) that the price in the contract must be the same as determined in the valuation, and (iii) that a failure to comply with these rules will result in the contract being invalidated. In real estate transactions, violation of Section 196a causes a major defect in the title chain.