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Simple English definitions for legal terms
arm's-length price
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A quick definition of arm's-length price:
Arm's-length price: This is a term used to describe a fair price for something that is being bought or sold between two parties who are not related to each other. It means that the price is not influenced by any special relationship between the two parties, and is based on what a similar item would cost in the open market. For example, if you were selling a car to a stranger, you would want to get an arm's-length price for it, which means a fair price that is not influenced by any personal relationship between you and the buyer.
A more thorough explanation:
An arm's-length price is a fair market value price that is agreed upon by two parties who are not related or affiliated with each other. This means that the price is determined by the forces of supply and demand, without any influence from personal relationships or business connections.
For example, if a company wants to sell a product to another company, they must agree on an arm's-length price that is fair and reasonable. If the two companies are related or affiliated with each other, they may be tempted to set a price that is not based on market conditions, but rather on their personal relationship. This would not be considered an arm's-length price.
Another example would be if a company wants to transfer assets to a subsidiary company. The two companies must agree on an arm's-length price for the transfer of assets, to ensure that the transaction is fair and reasonable.
These examples illustrate the importance of arm's-length pricing in ensuring fair and competitive business practices. By setting prices based on market conditions, rather than personal relationships, companies can avoid conflicts of interest and maintain a level playing field.