Many companies must have a legally binding agreement before business deals can happen. These agreements are called “contracts”. When an acquisition is completed, contractual agreements serve as the foundation for all future interactions between the parties.
Below is a 7-step process employed by Fintalent’s contractual agreements consultants for an effective agreement.
Step 1: A contract should always clearly set out what rights each party has over any documents that take place during the deal in question. It should also define which entity will exercise those rights (e.g., individual or company) and how often and when those rights are exercised.
Step 2: The parties should be provided with the opportunity to disclose all of their relevant information. This should include information regarding shareholding, financial information, company structure, and all related corporate documents. Often, this is known as a “Conflict of Interest and Confidentiality Statement”.
Step 3: The contract must be drafted to reflect the exact terms agreed at the time that it was signed. This means that any changes made to the terms must be communicated in writing in a manner that allows both parties to clearly understand them.
Step 4: Once signed, all contracts are legally binding. However, a contract does not have to be approved by the other party before it is signed. If a contract is entered into without the agreement of both parties, then any changes to the terms will have to go through legal channels.
Step 5: Making sure that all parties agree on what their rights and obligations are before starting work on the deal can help prevent misunderstandings in the future or disputes later. In addition, confirmation of these rights should take place in writing via email so that everyone is clear on what they are agreeing to.
Step 6: The contract must be properly signed. The most common way to do this is by hand, but electronic signatures and other methods are also acceptable.
Step 7: Once a contract is signed, it must be filed with the body that regulates business transactions in your jurisdiction. The correct venue depends on where you are based.
11 Key Questions when Entering a Contractual Agreement
- Are there any special considerations when using Electronic Contracts?
The biggest difference between paper and electronic contracts is that they can be used in different ways. For example, paper contracts are often kept in bank safe deposit boxes whereas electronic copies are often left digitally on a device for easy access by all parties involved in the transaction. Additionally, paper contracts tend to be more difficult to view, print and sign as compared to their electronic counterparts.
- 2) How is a conflict of interest defined? A conflict of interest is a term that refers to the situation in which parties involved in a transaction have competing interests. For example, if one party owns shares in another company that are worth the same amount as the company they wish to acquire, then this will give them a direct interest in the acquisition knowing that it will increase the value of their holdings or create an opportunity for them (e.g., opening of new markets).
- Is it important to disclose all relevant information to both parties and how is this achieved? A fundamental aspect of any business deal is the exchange of relevant information between the parties involved. However, in certain jurisdictions, there is no legal requirement that this takes place. Consequently, this can lead to disputes on what constitutes as “relevant information”. Put simply, the more information that a party receives about its counterparty, the more likely they are to feel confident in the transaction. However, it should be noted that certain kinds of information may be considered confidential or even a trade secret by some companies which limits what can be disclosed.
- Is it important to have the contract ratified by each party before a deal is completed? Once a contract is completed, it becomes legally binding. However, this does not mean that both parties have to agree with the terms of the agreement before they are signed. If they sign without first being given the opportunity to review and accept or reject the terms, then any changes made to these terms after that point must be done in writing in order for both parties to clearly understand them. The lack of written confirmation could lead to disputes later on as the parties cannot go back and prove that certain terms were agreed upon at some stage during negotiation.
- Is it important to have a contract signed by both parties, witnessed and signed by a notary? A contract is legally binding once both parties have signed it. Consequently, it is important that the contract contains all of the relevant details in order to be enforceable. If any terms are missing or unclear, then later disagreements could arise which could prevent one or both parties from fulfilling their obligations under the agreement.
- Is it important to have signed copies of contracts filed in the correct places? Once a contract is signed, it is important that a copy is filed with any relevant governing bodies such as your local patent office. This will prevent anything that is contained within the contract from being invalidated by another party for being made after the fact. A good example of this would be if you incorporated a company and then tried to file a contract on behalf of said company afterwards which was signed by one party but not the other one. The opposing party could challenge this on the basis that you had already created your business prior to signing this document thus making it void under certain circumstances.
- Is it important to have all parties physically sign the contract? At the time when a person is applying to become an employee, they are entering into a contract of employment with their employer. The contract will usually be drafted in a similar way to any other business contract that exists and will contain many of the same legal protections. However, simply having this signed by both parties will not constitute as legally binding and could lead to disputes if anything subsequently goes wrong. In addition, they may wish to obtain additional legal advice prior to signing the agreement as a certain company might be bound by certain terms contained within it but not all other companies in that industry might share this concern.
- Is it important to have a signed copy of the contract preserved in case there are any disputes? Parties involved in a contract may want to be certain that they can produce evidence of their signature when they later dispute a transaction. This could be particularly important if they wish to claim that something was not properly understood at the time of signing or if they have acted on the basis of an incorrect understanding.
- How should disputed transactions be handled? If there is an issue regarding a transaction that is later disputed, then this could lead to serious issues for both parties involved. For example, if one party feels that they have been misled in order to obtain an unfair bargain, then the other party may have an incentive to avoid making things right and to trick them into signing a new contract which contains more favourable terms. Underlying all of these questions is the concept of entering into a legally binding agreement by mutual consent from both parties with all terms agreed upon. This can be achieved by ensuring that all relevant details are properly laid out and understood at each stage of the negotiation stage. In addition, it is often recommended that any signed documents should be filed with relevant governing bodies such as the patent office so that disputes can be brought forth on the basis of conflicting terms.
- Should contracts contain a formal clause stating that a contract is binding upon its execution? This question is related to the above question “Should all contracts be ratified by each party?” If an agreement is made without first being ratified by both parties, then this could lead to legal problems if one of the parties later disputes the terms of an agreement.
- In addition, it would be advisable to assert that any actions taken by one party were on the basis of a previous understanding rather than under duress. An example of this would be if you sign a contract with a company to supply them with goods on a monthly basis and they subsequently reported that they could not pay up front. Rather than tell them that they cannot have the goods until payment is received, you might instead decide to accept payment after each delivery has been carried out as it may be more beneficial to do so if you are worried about being sued for failing to deliver the goods in future. The idea behind this question is that one party may attempt to argue that an agreement was invalid or non-binding under certain circumstances. For example, a person could later argue that they were under undue influence when they signed an agreement or they may claim that they had a lack of mental capacity and were unable to properly understand what the agreement was saying.