Legal Definitions - arm's-length price

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.