Imagine this scenario: Your company has successfully raised its initial seed investment, and you’ve executed a shareholders’ agreement (“SHA”) with the investors from that round. Now, it is time to take things to the next level by raising another investment. But wait, there is a potential roadblock ahead. You’re probably thinking about the legal costs involved in drafting a brand-new shareholders’ agreement and the tedious task of getting it signed by all the new investors.
There is a nifty solution to this conundrum, and it is called the Deed of Adherence (“DOA”). Generally, all SHAs come equipped with a provision for a DOA, which exists solely to save you from the hassle you’re currently envisioning. A DOA streamlines the process and ensures consistency across all your shareholders with no more renegotiating and redrafting. It is an efficient transition that keeps everyone on the same page. So, what exactly is a Deed of Adherence? Let’s dive in.
What is a Deed of Adherence?
The DOA contractually binds the new shareholders to the terms and conditions outlined in the original SHA. This ensures that all shareholders, whether existing or new, are subject to the same set of rules and obligations governing the management of the company and the relationships between shareholders. By signing the DOA, the new shareholders formally accede to the SHA and agree to be bound by its provisions related to share transfers, voting rights, dividend policies, exit clauses, and other key matters. This helps maintain consistency and prevents new shareholders from disrupting the established governance structure laid out in the original SHA.
To put it simply, it is like a magical key that allows new investors to join your existing SHA without having to go through the entire process of drafting a new one from scratch. When a new investor comes along and wants to invest in your company, instead of starting from square one, they simply sign the DOA. By doing so, they agree to be bound by the terms and conditions outlined in your existing SHA, effectively becoming a party to it.
When to use a Deed of Adherence?
With your shareholder base growing like a well-tended garden, it is crucial to ensure that everyone is on the same page when it comes to corporate governance. This is where the DOA comes into play, acting as a legal gatekeeper for your shareholder family.
A DOA becomes an indispensable legal requirement in situations where there is a change or addition to your company’s shareholder composition. It is a ceremonial handshake, welcoming newcomers into the fold while ensuring they abide by the existing SHA.
The need for a DOA arises in various situations involving changes in a company’s shareholding structure. This includes the issuance of new shares or receipt of fresh investments, the transfer of shares from an existing shareholder to a new party, the exercise of stock options or equity incentives by employees, corporate restructuring, mergers or acquisitions that introduce new shareholder entities, share succession to new family members, or the formation of joint ventures involving equity ownership. In such cases, executing a DOA ensures that the new shareholders are bound by the existing SHA and its terms and conditions.
Are Deed of Adherence and addendum the same?
Parties to a SHA frequently confuse the distinction between a DOA and an addendum. It is not uncommon for a DOA to be mistakenly used for amending an SHA. However, these two legal instruments have distinct purposes and implications, understanding these differences is crucial to ensuring accurate amendments and avoiding legal pitfalls.
A DOA is a legally binding document used to bring a new party, such as an investor or shareholder, under the terms of an existing SHA. Its primary function is to ensure that the incoming party is bound by the rights, obligations, and restrictions set forth in the original agreement. The DOA does not modify or alter the terms of the SHA for the existing shareholders, instead, it merely extends the application of those terms to the new party.
In contrast, an addendum is a supplemental document that modifies or amends specific provisions of the SHA. It is executed by all existing shareholders who agree to the proposed changes. Unlike a DOA, which solely adds a new party to the SHA, an addendum can encompass a broad range of modifications, such as changes to voting rights, transfer restrictions, dividend policies, or any other terms deemed necessary by the shareholders.
The execution process and timing for a DOA and an addendum also differ. A DOA is typically executed when a new party joins, while an addendum may be utilized at any point during the company’s lifecycle when existing shareholders collectively decide to modify the agreement’s terms.
Conclusion
In an era where corporate landscapes are constantly shifting, deeds of adherence stand as guardians of stability and fairness. They enable companies to grow and evolve while ensuring that the fundamental compact among shareholders remains intact. By facilitating smooth transitions, promoting legal clarity, and safeguarding the interests of all parties, these deeds are indispensable tools in the art of corporate governance. As businesses continue to navigate the complexities of shareholding structures, the Deed of Adherence will undoubtedly remain a cornerstone of harmonious and equitable corporate growth.
Opinion
The DOA is a pragmatic tool in corporate law, particularly beneficial in maintaining consistency and efficiency when integrating new shareholders into existing SHA. By leveraging the DOA, companies can streamline the process of expanding their shareholder base without the need for extensive renegotiations or drafting entirely new agreements. This approach not only saves time and resources but also ensures that all parties involved are bound by the same set of governance rules and obligations, thereby fostering stability and clarity in corporate governance practices.
So, the next time you’re gearing up for another investment round, remember the mighty Deed of Adherence. It is your secret weapon against legal costs and time-consuming processes, allowing you to focus on what really matters: growing your business and achieving your entrepreneurial dreams.
Author: Kritagya Agarwal
