Most of us don’t love legal contracts – they are often hard to understand and costly to prepare. In the thrill of the moment we may skip through the fine print without full understanding, signing the agreement in hope of a good outcome.
But the details of the contract often determine our financial success or failure (and whether we end up with a big, expensive problem).
Important business contracts include:
Sale and Purchase Agreements (S&P)
Sale and Purchase agreements are used when buying or selling real estate, a business, or other assets. The agreement stipulates the agreed price, whether and what the agreement is conditional on, when the contract will become unconditional, how GST (if any) will be treated, when payment must be made, and may include specific clauses that the purchaser and vendor have negotiated.
The agreement must be signed by the vendor and the purchaser.
Deeds of Nomination
If the S&P contract is signed before the ownership of the asset being purchased has been decided/ formed, you can enter into the agreement in your own name/entity “or nominee”. Your lawyer will prepare a Deed of Nomination prior to settlement to nominate the entity that will complete the transaction and take legal title.
The Deed of Nomination must be signed by the original buyer and the party being nominated to take legal title on settlement.
Shareholders Agreements
When shares in a private company are owned by different parties a Shareholders Agreement is highly recommended. A Shareholders Agreement is designed to give clarity to all shareholders about how the business is to be run and what will happen in certain situations.
For example, a Shareholders Agreement may cover:
- the number of directors each shareholder can appoint,
- the dividend policy,
- shareholder loans and additional corporate financing,
- what happens if one shareholder dies / gets sick and can’t work,
- how shareholder disagreements will be resolved, and
- the process if a shareholder wants to leave the business or sell their shares.
Negotiating a Shareholders Agreement can be tedious, but if well designed it can save significant time and money in the future. Your company may become your most valuable asset and a Shareholders Agreement (or lack of) can significantly impact the value of your shares.
A Shareholders Agreement should be signed by all the shareholders, and a new agreement entered into when a new shareholder acquires shares in the company.
Summary
Buying or selling assets such as real estate or a business, or going into business with other people, may be one of the most important decisions you will ever make. We recommend that you take expert advice and fully understand the agreement before you sign.
Taking expert advice before you sign will cost you some money. But, in the long run good advice will save you much more than the initial cost.
“It is contracts that make or break a company.”
Varun