Corporate Agreement Defined
Corporate Agreements are Contracts between the owners of Corporations and/or LLC’s (their "Members"). These agreements typically detail the provisions that govern the respective rights and responsibilities of the owners, and the structure and operations of the business, as well as the general business purpose and outline of the entity’s operations.
Typically, Corporate Agreements define in detail the majority shareholder’s rights over the company. Often the Corporate Agreement requires the other shareholders to support those decisions, otherwise the deal may be vetoed by the minority shareholder. Further, stock and membership interest buy-back clauses are often used to expedite the sale of shares if triggered by a life event, e.g., death, divorce or bankruptcy.
Corporate Agreements provide a roadmap for the company to follow in the event an owner wants to take their economic interest out, or if there is a death of an owner, or if a divorce, bankruptcy or lawsuit event occurs . These events can have disastrous consequences for a company not organized or planned for the outcome. For example, in some cases if an owner files for personal bankruptcy or gets divorced, the creditors or ex-spouse can liquidate the interest in the company, which can mean the remaining owners are forced to buy out the ex-spouse or creditor. In some respects, LLC Agreements provide greater protection than a typical corporation because an LLC is a more flexible entity, and its membership can only be assigned with the consent of the managers (the owners). In contrast, most shareholders of a corporation have a unilateral right to sell their shares.
It is important to have Corporate Agreements drafted in a way that will consider the potential for high-risk events, such as bankruptcy, divorce and death. Corporate Agreements may help the company continue to operate and avoid having to dissolve.
Varieties of Corporate Agreement
Partnership Agreements are probably the most common form of corporate agreements. These include both general and limited partnerships. A general partnership consists of two or more partners who together operate, manage, and control the business and share in the profits, losses, expenses, and liabilities. If general partners commit themselves to an enterprise, they can be held personally responsible for the debts incurred by the business. Unless a different agreement provides otherwise, any partner can bind all the partners to a contract entered into in the ordinary course of business. A limited partnership is one in which partners contribute capital but do not participate in the management, so their liability is limited to their investment.
Shareholder Agreements are usually entered into by the shareholders of a corporation. The shareholders enter into the agreement for the purpose of perpetuating the business in the event that a shareholder dies or is disabled, becomes incapacitated, or retires. Such an agreement may also be used to limit the transfer of shares and to permit parties holding a majority interest to buy out a minority interest.
Joint Venture Agreements are frequently used when large-scale commercial projects are contemplated but the parties want to maintain separate business identities and management structures. Another reason for entering into a joint venture may be to take advantage of particular financing techniques or tax treatments. Generally speaking, a joint venture is a venture between two or more parties by statute; contract; or agreement without statutory authority.
Components of a Corporate Agreement
There are several key components of a corporate agreement that are essential in order for the parties to understand their obligations and responsibilities under the contract. While not a complete list, the following are the key components that you should be sure are in every corporate agreement you have.
Scope of Work. One of the most important components of any corporate agreement is the scope of work clause. This clause defines the specific services or deliverables agreed to by the parties. The scope of work also typically includes a timeline for completion of these services or deliverables. Because of the importance of this component, the parties may want to consider including the terms and conditions of the corporate agreement into the scope of work as a component of the overall scope of work.
Responsibilities. Similar to the scope of work provision, many corporate agreements will contain a responsibilities section. Here the agreement may outline the obligations of each party to the other in order to define the scope of obligations what each party is required to contribute to the arrangement.
Payment Terms. A common source of disputes on a corporate agreement is the payment terms. The payment clause typically defines the payment method as well as the general timing of payment (i.e. the payment schedule).
Dispute Resolution. In almost all corporate agreements there will be some form of dispute resolution clause. These clauses can take many forms, including mediation clauses or even clauses requiring arbitration. Mediation does not require binding decisions by the mediating party and generally requires the mediating party to act somewhat as a facilitator and encourages the parties to reach an agreement outside the scope of the corporate agreement. Disputes over corporate agreements are an unfortunate reality, but these disputes can easily be avoided if you ensure that your corporate agreements are well-written and include certain common provisions.
What to Keep in Mind When Drafting a Corporate Agreement
When drafting legal documents for a corporate entity, the primary goal is to ensure that the documents comply with all relevant laws and regulations. This includes adherence to state and federal laws governing corporations, as well as any industry-specific regulations that may apply. Corporations must also ensure that their agreements comply with any internal policies and procedures, as well as any ethical or professional standards that may apply to their operations.
In addition to compliance with laws and regulations, it is important for corporate agreements to be clear and unambiguous. This helps to avoid confusion or disagreement among corporate stakeholders and ensures that all parties understand their rights and obligations under the agreement. Clarity can also help prevent disputes or legal challenges down the line, as it allows for a clear and accurate interpretation of the agreement.
It is also crucial to avoid common pitfalls when drafting corporate agreements. One of the biggest pitfalls is failing to account for potential changes in the future, either within the corporation or in the broader legal and regulatory environment. For example, changes in ownership structure, changes to the law, or even changes in the corporation’s operations can all impact the way that an agreement should be drafted. Failing to consider these possible changes can result in an agreement that is no longer applicable or useful to the corporation.
Another common pitfall is failing to seek professional assistance in drafting corporate agreements. While it can be tempting to try to save money by drafting agreements in-house, this can lead to costly mistakes down the line. Having a qualified legal professional draft or review corporate agreements can help ensure that they are comprehensive, compliant, clear, and unavoidable.
How Negotiation Plays a Role in Corporate Agreements
Negotiation is a critical component of the corporate agreement process. It is the stage at which the interests, goals, and legal positions of the parties are fully fleshed out through dialogue, back-and-forth communications, and compromise. Well-conducted negotiations ultimately produce an agreement that strikes the right balance for both parties, which does not always occur when parties forego negotiation to move directly from an offer to agreement.
Negotiation isn’t merely about reaching a compromise or splitting the difference. It’s about understanding the value (or cost) of the various items on the table , whether a piece of information that is requested by one side or a clause in the agreement that seeks to impose stipulations or limitations upon the other party. That is why each side needs to be aware of the various ways in which its counterpart values the agreement as a whole and can be expected to negotiate. The goal is to express your own ideas about how various items should be addressed in the agreement while establishing a channels of communication for understanding the other party’s perspective.
Negotiating parties should keep in mind the negotiation strategies and qualities of successful negotiators, including: These negotiation qualities should be practiced in conjunction with a negotiation strategy for approaching an agreement like, for example, a large imbalance of bargaining power (pricing) or a short time frame. Drafting an agreement with contractual provisions that promote negotiation, like requiring the parties consult each other before they go to court, is another effective technique.
Negotiation is sometimes regarded as an art, but in business it’s a skill that can produce excellent results that will greatly benefit both parties.
Amending a Corporate Agreement
In most cases, you will need to amend a corporate agreement. A corporate agreement is a sort of contract, and contracts are always subject to the influence of time. One or more controls of your company membership may have been added or deleted since the agreement was filed away. Your company might have moved to a new accounting cycle. An action by a director or officer might have altered the company’s responsibilities to its shareholders or creditors. A relevant law or regulation may have changed.
Changes that are limited to a single board member come under the auspices of the bylaws. Simple changes such as an extension or reduction of term of membership or a change of address do not need to be submitted to a governmental agency. However, any change that significantly affects the membership as a whole must be handled as any other corporate amendment, even if it only deals with a single position.
Amending a corporate agreement is a fairly simple process. It consists of a few elements: First, amending an agreed-upon corporate agreement requires your statement of the basis for amending, lays out what is being added, deletes the relevant term or section in its entirety, and/or modifies a clause. Then it must be executed and the change must be officially recorded in the corporate archives. Finally, amended documents must be filed with the Internal Revenue Service as part of your annual filing process and with your state once. This means that you have to amend in triplicate. Both the Internal Revenue Service (IRS) and your state will have a system in place for amending corporate agreements. If you cannot find a clear course of action or you do not want to waste time trying to figure out how to make a proper amendment, a lawyer or consultant experienced in working with corporations can be an invaluable resource.
Resolving Disputes within the Corporate Agreement
Disputes are an inevitability when drafting corporate agreements. When it comes to corporate agreements, disputes can arise over shareholder agreements, acquisition agreements, supply agreements, joint ventures, or many other common deal types.
For this reason it is essential that you include a dispute resolution mechanism in your agreement, this can usually be found in a dispute resolution clause of your corporate agreement. Over the last couple of decades there have been a number of different dispute mechanisms that have made their way into corporate agreement. The following is a breakdown of the most common dispute resolution mechanisms:
Mediation: In mediation both parties and their counsel present their case to the mediator. The mediator will determine the strengths and weaknesses of the party’s case and make a recommendation as to how to resolve the matter. These recommendations are not binding on the parties but allow them to see where they are more likely to be successful. At this point the parties may settle based on the recommendation or engage in further settlement negotiations. While this is a non-binding mechanism neither party is worse off at the end. The biggest benefit to mediation is that you can tailor the process to meet your needs. For example you can pick when and where the mediation occurs, you can pick the mediator and you can scope the discussion to limit the impact on the company. Of course the downside is that you have to go through the cost of the mediation.
Arbitration: Similar to mediation, the parties have to submit their disputes to an independent arbitrator. In arbitration you can select the arbitrator (instead of having a court appoint an arbitrator), you can select the language of the proceeding, the parties can agree on the process and the venue. Unlike mediation, in arbitration the parties have agreed to ask the arbitrator to issue a binding decision. Finally, the parties must agree to be bound by that decision even if they believe the decision is incorrect. The biggest downfall to arbitration is that the process can become very formal depending on how the parties set up the proceedings. In a worst case scenario arbitration can start looking like a regular trial with opening statements, examination-in-chief, cross-examination, and closing submissions all occurring before the arbitrator. The advantage of arbitration is that the process is usually reasonably quick and allows a third party to issue a decision. For this reason it is also much cheaper than litigation. Last, the parties avoid the exposure of having a public trial.
Litigation: The process to commence litigation in a Canadian court is rather simple. Generally speaking litigation will be commenced in the appropriate jurisdiction shortly after a party obtains the opinion of counsel that they have been wronged. Unlike arbitration the parties must participate in litigation even if they find it (or the other party) completely unreasonable. Once a party is engaged in litigation they are at the mercy of the court and the litigation process in that jurisdiction. If the process is lengthy then the parties will have to undergo periods of uncertainty and spend extensive resources on litigation expenses. The advantage to litigation is the decisions of the courts are generally seen to be more "reliable" by the parties. This is because courts do not possess the same conflict of interest that can plague other forms of dispute resolution. Courts make decisions based on what will result in a benefit to the justice system as a whole (considerations of the public interest).
The decisions of the courts can also become important should the parties wish to appeal. For this reason, in most corporate agreements it is advised that the parties only agree to resolve disputes in court if there is no other possible option to resolve the dispute. While the parties cannot dispose of the enabling jurisdiction of the court, they can agree to have the court proceedings delayed until after other forms of dispute resolution have been exhausted.
Choosing the Proper Legal Representation for a Corporate Agreement
When your company is involved in corporate agreements of any kind, it is important to see that counsel with experience and expertise in corporate agreements drafts them. Because corporate agreements are often also transactional agreements, a counsel with a more corporately and/or business-minded perspective can be very valuable. This appears to be an increasing area of transactional law that many law firms are highly interested in, so counsel with this type perspective is becoming easier to locate.
For those seeking litigation counsel who are able to draft contracts for them as well, this type counsel is not as easy to find, particular in Eastern NC. Unless "local counsel" consists of someone with strong business or corporate backgrounds as well as strong litigation backgrounds, that combination may be found primarily in the Raleigh or Charlotte area, with a limited number in other metropolitan areas. Many of the remaining practitioners may only be accustomed to drafting contracts in litigation contexts, which may or may not result in the same level of mastery in general commercial contracts. In such cases, finding the right local counsel, experienced and competent in the areas of corporate agreements in which you are seeking assistance, is essential . In fact, those local counsel with such backgrounds may even be knowledgeable enough about the particulars of the various types of agreements to be able to provide referrals to counsel practicing further afield (and perhaps with more experience in this niche area), if such counsel is needed.
"Corporate agreements" covers a broad range of agreements. Properly drafting and reviewing a simple employment agreement presents challenges and issues extending beyond the specifics related to the employment relationship itself. For example, how enforceable is the noncompetition provision? How does it effect the treatment of confidential information? Agreements involving non-competition and/or reconciliation provisions are evolving, and case law is developing within North Carolina, at both the North Carolina Business Court, and within the appellate courts. Agreements and provisions governing forbearances or releases also require careful attention and caution. However, the range of corporate agreements extends beyond employment agreements into agreements with investors, clients, suppliers, other businesses, and subdivisions of larger businesses. Building any relationship requires understanding the precise contours of the employment relationship, business relationship, and/or the obligations undertaken in order to properly craft a contract that meets the intended needs of all parties.