Understanding Affiliated Persons: Directors, Officers, and Shareholders

What Is an Affiliated Person?

An affiliated person is someone in a position to influence the actions of a corporation, such as directors, officers, and certain shareholders. Depending on the context, an affiliated person might be referred to as an "affiliate," "control person," or "insider." The role carries regulatory importance due to the access to nonpublic information and increased scrutiny of transactions.

Detailed Insight into Affiliated Persons

In connection with a securities registration, the Securities and Exchange Commission (SEC) expands the definition of an affiliated person quite broadly. Form S-11 defines an affiliated person to also include:

1. Persons owning 10% or more of any class of a company's stock
2. Any person who is a promoter of the company and connected with the company in any capacity
3. Any principal underwriter of the securities being registered
4. Any person providing management or advisory services for the company
5. "Any associate of any of the foregoing persons"

Distinguishing affiliated persons from others is important in the regulation of securities transactions. Affiliated persons often have access to inside information and thus their transactions are more carefully regulated.

Important Considerations for Affiliated Persons

In bankruptcy proceedings, affiliated persons are anyone who owns or controls any part of a company. A debtor is an individual or company filing for bankruptcy, so their affiliated persons would be those who own the debtor corporation...or those who own the owner of the debtor.

Affiliated persons who own 20% of the company or more or have voting power equal to that percentage are considered affiliates. In other words, an affiliate is a company or individual that owns 20% of a company. However, in reference to owners, who hold securities as a fiduciary, debt controller, or agency, such rules for affiliates do not apply.

In the context of a loan agreement, affiliated persons are individuals or entities, who control or own a large portion of the entity taking out a loan or offering a loan. Again, these affiliated persons can wield control over the organization, either directly or indirectly. However, these rules do not apply to subsidiaries of an entity.

In addition, if an organization operates under an operating agreement or lease of a debtor, that organization is considered an affiliated person.

By law, affiliate persons are restricted from engaging in certain actions, such as selling any security or other property to such registered company, or to any company controlled by such registered company—unless such sale only involves the following:

• Securities issued by the buyer
• Securities issued by the seller and which are part of a general offering to the holders of a class of its securities
• Securities deposited with the trustee of a unit investment trust or periodic payment plan

The Bottom Line

An affiliated person can influence corporate decisions and include directors, officers, or certain shareholders. Rules from the SEC apply broader definitions to prevent insider misuse and conflicts of interest. Transactions involving affiliated persons face added restrictions across securities, bankruptcy, and lending contexts.