The Importance Of Getting Your Documents Checked

It is extremely relevant in any organisation to have ones legal documents checked.

The real question is what would happen and what impact would this have on your organisation if some of these documents were wrong or not favourably drafted having due regard to the company’s commercial and long term interests. Examples of these that continually arise are:

1. Shareholder or Partnership Agreements

Do you have a proper Shareholder Agreement in place to deal with a shareholder’s shares and interests in a company where for example:

  1.  a shareholder dies or becomes incapacitated;
  2. a shareholder leaves the employ of the company;
  3. a shareholder discloses confidential information belonging to the company to a third party competitor;
  4. a shareholder continually upsets staff of the company or acts in an improper or indecent manner;
  5. a shareholder only wants to work part-time in the business of the company; or
  6. a shareholder should be restrained from competing with the business of the company.

 The same issues would apply equally in relation to a partnership arrangement.

 2. Structure

Has the right structure been adopted and have you taken tax, legal and accounting advice in setting up the correct structure for your business.

For example:

(a) it is often worthwhile to consider putting all the intellectual property rights in a separate company and charging the operating entity a royalty for the use of such rights. This also allows the company to house the intellectual property rights separately and protect them legally from claims which might otherwise arise against the operating company; or

(b) have the shareholders considered holding their shares through trusts which may well have advantageous tax consequences for the shareholders.

3. Distribution Agreements

Often Distribution Agreements are linked to performance indicators and could be subject to termination at short notice. It is imperative that these agreements be reviewed from time to time in relation to:

  • (a) performance indicators;
  • (b) geographical restraints or the right to acquire new territories;
  • (c) accounting procedures and timing of payments;
  • (d) renewal provisions; and
  • (e) appointment of sub-distributors.

A Distribution Agreement which is terminated can affect the company’s performance dramatically and hence its value.

4. Leases

Commercial leases should be checked by a lawyer.

Areas of particular importance relate to:

  • (a) annual rental increases and how these are determined;
  • (b) options to renew;
  • (c) calculation of market related rentals upon exercise of an option;
  • (d) make-good obligations of the tenant upon termination;
  • (e) payment of outgoings; and
  • (f) insurance provisions.

 5. Licences

Is the Company operating under the correct licences? What impact would this have if the correct licences were not in place?

6.  Employment Agreements

Do you have proper employment agreements in place for your employees? Given that employees are one of the biggest assets in a business, it is imperative to have employment agreements that correctly reflect the arrangements between employer and employees.

Case Study

In a recent case, we found that an owner of a business had engaged his employees as consultants in the business.

When the sale of the business was being negotiated, it transpired that the ‘consultants’ were actually employees of the business and their add-on costs and superannuation benefits had not been paid for more than five years.

The reputation and goodwill of the business were tarnished due to the owner’s oversight and the sale of business was delayed while these issues were being resolved. Rather than these add on costs being expensed over time, the owner had to find the cash resources to pay these costs at one time.

In addition, have you provided for the following matters in your employment agreements:

  • (a) confidentiality undertakings by the employee;
  • (b) handing over all material and computer software in the event of termination of one’s employment;
  • (c) the provision of moral rights ie whatever the employee creates or designs during the course of employment should be transferred to the Company;
  • (d) non-compete undertakings by the employee for a period of time including not to utilise or access customer lists or data in relation to the business of the Company.