Related-Party Transactions: Governing the Normal Condition
Most governance writing treats related-party transactions as a warning sign — the thing you look for when you suspect something is wrong. In a clinical-stage biopharma company, that framing is close to useless, because related-party transactions are not an aberration. They are the ordinary condition of the enterprise.
The science came out of a university lab, and the founder is still on the faculty there, and the company licenses the foundational patents from that institution. The scientific advisory board holds equity and is paid in consulting fees. An investor's other portfolio company provides a service the company needs. A director's spouse runs the contract research organization that is genuinely the best option in the region. The founder consults for the company through a personal entity. A board member's venture fund is leading the next round. None of this is unusual, most of it is benign, and much of it is how the company got built at all.
So the governance question is not how to eliminate related-party transactions. It is how to handle a standing condition routinely and well — so that the twentieth such transaction is processed cleanly by a system the board established long ago, rather than becoming the one that is later held up as evidence that nobody was watching.
This article is about building that system. It is distinct from the question of a single high-stakes conflicted financing, which has its own dynamics. Here the challenge is volume, familiarity, and the slow erosion of scrutiny that comes from doing something a hundred times.
(This article is governance guidance, not legal advice. The law in this area changed materially in 2025 and parts of it face ongoing challenge; any board should work from current advice of counsel rather than from a general article.)
Why Routine Beats Episodic
The failure mode in related-party governance is rarely a single outrageous transaction. It is accumulation.
A consulting arrangement is approved in year one when it is small and obviously reasonable. It is never revisited as the scope grows. A service agreement with an investor-affiliated vendor is signed because the vendor was available and the terms seemed fine; nobody compares pricing again for three years. A founder's academic lab receives sponsored research funding under an arrangement set when the amounts were trivial. Individually, each is defensible. Collectively, they form a web of economic relationships between the company and the people governing it, none of which has been examined recently and several of which would be uncomfortable to explain to a new investor, an acquirer's diligence team, or a court.
The accumulation problem has a second dimension specific to this sector: these arrangements become load-bearing. The license from the university cannot simply be unwound. The founder's lab is genuinely where the expertise lives. By the time anyone examines the structure critically — usually during financing diligence or exit preparation — the arrangements are embedded in how the company operates, and fixing them is expensive and disruptive.
A board that handles these transactions through a standing process catches both problems early. A board that handles them case by case, on the merits, as they arise, will handle each one reasonably and still end up somewhere it did not intend.
The Approval Architecture
Delaware substantially rewrote the framework for conflicted transactions in 2025, and the changes matter enough that boards operating on older instincts are now working from an outdated map.
The core structure provides statutory safe harbors for transactions in which directors, officers, controlling stockholders, or control groups have an interest. For an interested director or officer transaction, the protection is available where the transaction is approved in good faith, and without gross negligence, by an informed vote of the disinterested directors — or where it is approved or ratified by an informed, uncoerced vote of a majority of the disinterested stockholders. A committee is required only where a majority of the board is not disinterested, in which case the committee must consist of at least two directors whom the board has determined to be disinterested.
Several features of the current framework are worth boards understanding specifically, because they differ from what many directors were taught.
The protection is broader than it used to be. The older provision principally prevented an interested transaction from being treated as void or voidable. The current safe harbor extends to claims seeking equitable relief and damages, which is a materially stronger shield.
A committee no longer has to be perfectly clean. Prior practice held that a single conflicted member could defeat the protection a committee was meant to provide. Under the current framework, a majority of the committee must be disinterested, and — notably — the safe harbor can survive even if a court later disagrees with the board's determination about one or more members, provided a majority of the genuinely disinterested members approved the transaction. This is a meaningful change, and it rewards boards that make careful, documented disinterestedness determinations at the time the committee is formed.
Being designated by an interested party does not, by itself, make a director interested. This matters enormously in venture-backed companies, where directors sit by virtue of investor designation. The framework clarifies that designation, nomination, or election by a party with a material interest in the transaction does not alone negate a director's independence. That is not a free pass — the director's own interests and relationships still govern — but it removes a reflexive assumption that every investor designee is automatically conflicted in every transaction touching that investor's interests.
Public-company directors get a presumption. A director of a listed company is presumed disinterested as to a transaction they are not a party to, where the board has determined the director satisfies applicable exchange independence standards. The presumption can be rebutted, but only by substantial and particularized facts showing a material conflict.
Entire fairness remains available as an alternative. The safe harbors do not displace the traditional route of demonstrating that a transaction was fair to the corporation and its stockholders. They provide a procedural path to avoid having to.
The practical lesson for a board is that the protections are now procedural and specific. They are earned by doing identifiable things — determining disinterestedness deliberately, informing the decision-makers fully, documenting the basis — at the time of approval. A board that approves related-party transactions informally, without recording who was disinterested and why, has not availed itself of protections that were sitting there for the taking.
The Standing Protocol
What this looks like in practice is less dramatic than the legal framing suggests. A workable system has a few components.
A related-party register. A maintained list of every economic relationship between the company and its directors, officers, significant stockholders, founders, and their affiliates and immediate families. Most companies do not have one, and most are surprised by how long it is once they build it. The register is the foundation, because a board cannot govern relationships it has not inventoried.
An annual disclosure questionnaire. Directors and officers confirm their interests, affiliations, family relationships, and other board or advisory roles once a year. This is routine practice in public companies and uncommon in private ones, which is exactly backwards given how much denser the related-party web typically is in a private clinical-stage company.
Disclosure at the point of origination. The register and the questionnaire catch what exists; the real discipline is requiring that any new arrangement be disclosed before it is entered into, not after. Most related-party problems begin as an arrangement someone made without thinking it needed approval.
A defined approval pathway with thresholds. Not every transaction needs full board process. A sensible protocol sets thresholds — below which an arrangement can be approved by disinterested management or a committee, above which it goes to the disinterested directors — and specifies that the interested party does not participate in the deliberation or the vote. The point of a threshold is that it makes the handling automatic rather than a judgment call each time.
Contemporaneous documentation. Minutes that record who was determined to be disinterested and on what basis, what information the decision-makers had, what alternatives or comparables were considered, and why the terms were judged appropriate. Under the current framework this documentation is not merely good hygiene; it is the thing that establishes the safe harbor.
Periodic re-examination. Standing arrangements should be reviewed on a cycle — annually is reasonable — against the question of whether the terms are still appropriate and whether the arrangement is still needed. This is the specific antidote to the accumulation problem.
The Hard Cases in This Sector
Some related-party situations in clinical-stage biopharma are genuinely difficult, and a board should expect them rather than being surprised.
The university license where a founder-director is faculty. The company's foundational IP comes from an institution where a director holds a position and may personally receive a share of licensing revenue through the institution's inventor-sharing policy. The director therefore has an economic interest in the license terms that sits on the other side of the company's interest. This is ubiquitous and rarely improper, but it needs to be surfaced explicitly, and the director should not be the one negotiating the license or voting on its amendment.
Sponsored research at the founder's lab. The company funds research at the academic lab the founder still runs. The science may be genuinely best done there. The arrangement also moves company money to an entity the director controls, and the deliverables can be hard to evaluate independently. Boards should want clear scopes, defined deliverables, and arm's-length-comparable pricing — and should be alert when those are absent because everyone trusts everyone.
Scientific advisory board equity and consulting. Individually small, collectively significant, and often approved by the CEO without board visibility. Where SAB members are also directors or closely tied to them, the arrangements belong in the register.
Investor-affiliated service providers. A CRO, CDMO, recruiting firm, or software vendor owned by or affiliated with an investor. These are frequently fine and sometimes genuinely advantageous. They need comparables, defined terms, and a disinterested approval — and a board should be particularly careful where the relationship was arranged informally as a favor, because informal favors tend to lack the documentation that would later demonstrate fairness.
Family employment. A founder's relative in a real role. Not improper, frequently awkward, and best handled through the same disclosed, disinterested-approval process as anything else rather than through silence.
The Traps
Thinking small amounts do not matter. The threshold for scrutiny is the nature of the relationship, not the size of the payment. Small arrangements are where the habit of skipping process gets established.
Approving by consensus with the interested party in the room. The interested director's presence during deliberation undermines the process even where their vote was not needed. Recusal should mean leaving the discussion, not merely abstaining at the end.
Failing to determine and document disinterestedness. The current safe harbors turn on determinations the board is supposed to make deliberately. A board that never made the determination cannot rely on it later, however disinterested its members actually were.
Assuming a venture designee is automatically conflicted — or automatically clean. Neither is right. Designation alone does not make a director interested; the director's own stake in the specific transaction is what matters, and that requires an actual assessment.
Leaving cleanup to diligence. Related-party arrangements will be examined in any financing, partnership, or exit. A board that waits for a counterparty's lawyers to surface them is cleaning up under time pressure, with less leverage, in front of exactly the audience it would rather not have noticed.
The Underlying Principle
Related-party transactions in a clinical-stage company are not a sign of poor governance. They are a structural feature of building a company out of academic science with venture money and a small, interconnected pool of expertise. Treating every such arrangement as suspect would be both impractical and wrong.
What distinguishes a well-governed company is not the absence of these relationships but the presence of a system: they are inventoried, disclosed when they arise, approved by people without a stake in them, documented at the time, and revisited on a schedule. That system costs very little to run once established, and it converts a category of permanent low-grade risk into routine administration.
The alternative is not that the transactions go away. It is that they accumulate quietly, unexamined, until someone with an adversarial interest examines them first.
Lawrence Fine is CEO of AGCP Farmacêuticos and has advised on licensing, regulatory, and partnership strategy across the pharmaceutical and advanced materials sectors.