Arm's Length Transaction

An arm's length transaction is a transaction, often between two affiliated parties, that’s conducted as if the parties were unrelated. An arm's length transaction is carried out under free market conditions in which each party acts in its own self-interest. In the case of buying or selling, an arm's length transaction ensures outside parties that the arm's length transaction was conducted at fair market value. An arm's length transaction furthermore assures outsiders that the transaction did not involve any conflict of interest. Sometimes an arm's length transaction is facilitated by a third party to provide extra assurance that neither of the principal parties influenced each other. One example of an arm's length transaction is a company’s board setting the CEO’s salary (if the CEO had set her own salary, there would have been an obvious conflict of interest so it would not have been an arm's length transaction).