Accession Agreement: Putting an Agreement in Place
An accession agreement is a provision in a contract that sets out how and when an individual or entity can later join the contract. It is a commonly used legal device in commercial and business settings, and it has broad applications.
The most common context for such agreements is when a limited liability company wishes to allow new owners to enter into the ownership of the company. For this to happen, the owner and the new owner will enter into an accession agreement. The document serves as the agreement of the existing owner to allow the new owner to join the ownership at a certain point. Typically, the agreement includes specific language that will be incorporated into the operating agreement of the LLC. This means that the company’s charter documents must be amended to reflect the new member’s status in the company .
The agreement may also contain provisions for when the company must admit the new owner to the company’s LLC. For instance, a company may only allow new participants to enter into the organization yearly, instead of on an open-dated time frame. The agreement may also set a lower limit for how many individuals may join the company at a single time. If the entity chooses to withhold permission, the agreement should give the reasons for doing so.
Accession agreements have many uses in business and legal scenarios. The most common use is for a company or business arrangement with multiple owners to use it to admit a new participant to the organization. It has many other uses:
These documents have important legal meaning to them, so if the owner of a company wants to use an accession agreement to limit liability or for other purposes, they should consult their attorney.
Essential Terms of Accession Agreements
Accession agreements will typically involve four general elements. The first element, parties, are always the first element. These will be either the Buyer, the Seller or a variety of other types of parties such as lenders, third-party assignees, affiliates, suppliers, contractors, etc. Naming the parties accurately is essential to determining the correct acceding parties and avoiding later disputes on whether a party is bound by an Accession Agreement. For this reason, it is good practice to require an Accession Agreement from all parties that have the right to exercise any rights or fulfill obligations under the relevant commercial agreement.
The second element to an Accession Agreement is terms. Typically, an Accession Agreement will state that, by signing and returning the document, the acceding party agrees to be bound by all terms and conditions of the relevant commercial agreement. In this way, an Accession Agreement is like a collateral agreement to the relevant commercial agreement. Importantly, even if this is stated, the rights and obligations from the relevant commercial agreement will only pass to an acceding party if the commercial agreement is binding and enforceable, as this is a condition precedent to any rights being transferred from the original parties to an Accession Party pursuant to the relevant commercial agreement.
The third element is conditions. An Accession Agreement may provide that an acceding party is not bound by the terms and conditions of the relevant commercial agreement until the condition precedent is satisfied. Conditions precedent are common in new-money transactions and would typically include a requirement that the Accession Agreement be signed, dated and delivered to the lender on or before a specified date. A condition precedent may also be that certain conditions be satisfied or waived prior to the relevant Acceding Agreement becoming enforceable.
The last element in an Accession Agreement is an obligation. It will replace any obligations that the relevant parties would have under the relevant commercial agreement. This may include an obligation to make a payment, indemnify the original parties to the agreement, deliver the security documents or complete other actions required under the relevant commercial agreement.
Commonly intertwined with all four of these elements are different provisions that will appear. Some of these provisions include: (i) choice of law; (ii) no waiver; (iii) entire agreement clauses; (iv) severability provisions; (v) counterpart provisions; (vi) acknowledgments; (vii) releases; (viii) confidentiality; (ix) further assurances; and (x) amendments.
Accession Agreements raise some interesting issues that may be the subject of dispute between the relevant parties. These issues include whether all parties to the relevant commercial agreement should be required to sign an Accession Agreement and whether this can be avoided through the use of an appropriate acceptance clause within the relevant commercial agreement.
During the drafting of a new-money transaction it is important that the lender considers and addresses the need for an Accession Agreement. The failure to require the parties to the relevant commercial agreements to enter into Accession Agreements may limit the rights and remedies that would otherwise be available to the relevant parties if things go wrong.
The Many Uses of Accession Agreements
Accession agreements provide a number of advantages for organisations and individuals. These advantages can be particularly significant in comparison to other instruments that aim to regulate particular issues within a broader legal framework. The implementation of accession agreements is one factor that can allow for continuity and stability in the operation of organisation and/or legal entity.
For example, accession agreements can be the preferred form of written instrument in circumstances where it is preferable to establish ‘pacts in honour’ without creating relations, not only between the coming party and the fellow members of the legal entity, but also vis-à-vis any third parties who may join at a later stage.
Accession agreements can also be implemented in addition to – and therefore, alongside – a particular acquisition of a shareholding in a legal entity. The process of accession of the newcomer may, for example, take place after the acquisition of a shareholding. Further, an accession agreement is often entered into instead of the traditional apparatus of statutory and/or website disclosure requirements (on company websites) which are frequently not very useful.
Accession agreements also permit contracting parties to more easily amend the contractual terms that govern their relationship; i.e. the contracting parties can selectively amend those clauses that the newcomer is party to, without the need to seek additional consents or approvals from the remaining contracting parties.
Also, the absence of external formalities and restrictions that accompany certain acquisitions of shareholdings (that don’t apply to accession agreements) can be a key consideration in choosing to implement an accession agreement.
Typical Legal Results
Accession agreements inherently raise some legal considerations that investors already ought to be aware of. In particular, given the nature of an accession agreement that operates as a unilateral contractual addition, it is important to know and appreciate the doctrine of privity of contract. When two parties enter into a contract, their agreement only binds them and no one else. As a result, an accession agreement may set up a situation where the individual who was not part of the original agreement may not be bound by it. Potential financial and grant-seeking implications can be problematic when considering this may exclude the third-party from receiving grants or financial benefits that the rest of the signatories agreed on. It also disallows the third-party a say in any decision-making that the rest of the parties may elect to conduct. Generally, the parties to the initial agreement, and not the party who accedes to the agreement, will have the right to rely on the terms as though the non-signatory were a party to it. If the third-party wishes to prevent this from happening in the future, consideration must be given to negotiating for provisions to be included in the relevant agreement that will bind one or more of the signatories to the agreement. Because obligations bound by an accession agreement may extend to key directors or employees, it may be necessary to secure their consent so that they too are held accountable. One common way around the above potential risk is for the third-party to enter into a deed of adherence (or, alternatively, a deed of adherence), where the third-party essentially agrees to be together with the current signatories itself be bound by the agreement and all obligations thereunder. They not only bind themselves but also commit their heirs, executors, curators and representatives. In these deeds, proper definitions need to be considered. This ensures that the terminology used throughout the deed is effective in both binding the signatories and non-signatories to the agreement. It is obvious that there are substantially few risks involved in an accession agreement. Additional risks may include representations and warranties by the majority of parties to the deed for the purposes of the dependant parties depending on the specific of the relevant acts. It is important to ensure that the relevant parties sign the agreement before the relevant date set out in the main contract, or latest on the main contract date. Parties should check the accurate implementation of the deed of adherence before acting upon it. While relatively straightforward, an accession agreement has some legal implications that require adequate foresight and clear drafting.
Constructing a Great Accession Agreement
To create a comprehensive and enforceable accession agreement, there are several best practices to keep in mind. First and foremost, the agreement should clearly outline that the new member joins the existing multi-member LLC with all the associated rights and obligations. There should be no ambiguity about what the new member is entitled to, or what their obligations to the LLC will be. For instance, are they a simple junior member with no voting rights, or a junior member with voting rights? Are they entitled to distributions, and if so, when? Are they liable for all of the LLC’s debts? Who manages the LLC? It is vital that some basic rules intended for the entire LLC be applicable to the new member as well.
Second, as previously referenced, dissolution provisions must cover new members as well. What happens to their interest when the LLC winds up its affairs? Is a buy-sell provision applicable to them, or are the above-described default rules operative?
Third, the terms of the deal should be carefully outlined in the document. Specifically , who is paying what to whom in exchange for what? If someone is selling their membership interest to the new member, the agreement should specifically state how much is to be paid for that interest, and the terms of payment. Likewise, if the new member is contributing assets in exchange for being admitted (also known as making a capital contribution), the agreement must set forth the value of those assets, especially because it may affect overall valuation when the LLC is dissolved.
Finally, it is essential to make sure the document is properly executed by both the new and existing members. As previously stated, only the proper parties should be bound by the terms of the new agreement.
They say "an ounce of prevention is worth a pound of cure." This has never been truer than when it comes to signing on new members to your LLC. Even if it seems like nothing could go wrong, it is always advisable to consult with an attorney. A well-drafted accession agreement can save your business from expensive litigation later down the line.
Accession Agreements v Other Contracts
Accession agreements (sometimes known as accession deeds) are often confused with other types of agreements, such as membership agreements and partnership agreements. However, there are distinct features that make an accession agreement the more appropriate choice in certain situations.
Both membership and partnership agreements are between existing members of a company or a partnership. They regulate the internal rules of the company or partnership and may cover matters such as the rights and restrictions imposed on shares by the articles of association of a company or the application of a partnership agreement. A member or partner would be expected to know of any restrictions in these governing documents prior to acquiring a share or becoming a partner, in some cases prior consent may even be required. In contrast an accession agreement is a separate agreement in which a third party enters into along with the existing parties. This is often used when a company wishes to sell its shares to new shareholders or an LLP wishes to admit a new partner. The benefit of an accession is that the third party will directly agree to the contract with the existing shareholders or partners. An accession agreement will be useful to protect the interests of both the existing and new shareholders or partners.
It is important to remember that an accession agreement is only appropriate in limited circumstances. If you are dealing with an existing company or partnership it may be inappropriate. A transfer of shares or sale of a partnership interest may be better dealt with by a sale and purchase agreement (SPA) signed by both the seller and buyer. Such an SPA may contain aspects such as warranties, indemnities and consideration that may not be appropriate to an accession agreement.
Examples and Case Examples
A prime example of an accession agreement in action is the North American Free Trade Agreement (NAFTA). Originally signed in 1992, it provided a framework for trade and economic collaboration between Canada, Mexico, and the United States. When the agreement was signed, provisions allowed for the accession of other "developing Middle-East countries." As a result, Jordan formally acceded to NAFTA in 2010, becoming a full member of the agreement.
In terms of an accession agreement failure, the attempt to add China to the Multi-Lateral Investment Guarantee Agency (MIGA) is noteworthy . Founded in 1988, MIGA is a multilateral financial institution that provides insurance and grants to private investors and lenders to promote foreign direct investments in developing countries. While China’s accession agreement was ratified in early 1999 and signed into law by China’s President Jiang Zemin two months later, China was not a member of the Washington Convention empowering MIGA. The treaty itself never took effect, as MIGA was intended to insure investments in developing countries and China was already classified as a developing nation, making its investment climate ineligible for coverage.