Deed Of Adherence

A deed of adherence is a very important legal document that binds new shareholders in a company to the existing shareholders' agreement. Therefore, it alleviates the need to create a new agreement or update the existing one every time a new shareholder joins the company.

New shareholders should sign the deed, accepting their duties and responsibilities as important organizational stakeholders. It also contains other crucial information regarding the management, activities, etc. The deed is drafted in the best interests of the individual, organization, and other shareholders. 

Key Takeaways                                                               

• The deed of adherence refers to the document that acts as a supplement to the shareholders' agreement, through which equity holders in a company have permission to oblige to the duties and responsibilities that come along with the position of a shareholder.
• The deed of adherence format and the downloadable template is available online. Companies can use this by paying as little as $20 or consulting their lawyer.
• The deed contains the personal details of the shareholder, the details of the company, and information on ownership of shares, obligations, and rights, signed in the presence of a witness.

A deed of adherence to the shareholders' agreement is an essential document that plays a huge role in the organization's management. But first, let's take a look at shareholder's agreement. It is a legally binding arrangement between the company and the shareholders or members. It details each party's ownership, duties, and obligations towards the other.

The agreement's significance arises from the fact that ownership of shares in a company confers the investor with legal rights. The person's rights increase based on the number of shares, which can significantly affect the company's operations. Therefore, mutual understanding with goodwill is of prime importance. 

But such a document should be the holy gospel and not subject to constant changes with changing investors. Thus, a deed that functions as a supplement to hold the investors legally responsible and accountable for their actions is of utmost importance. The deed is so crucial that witnesses recognized by both parties should sign it.

The main purpose of a deed of adherence to the shareholders' agreement is that it functions as a supplement to the latter. The shareholder's agreement is a general document drafted by the company irrespective of who the investors are. Therefore, it applies to all investors uniformly. Hence, updating or altering the agreement as and when new shareholders keep coming up can be tedious and time-consuming. 

With a deed, the agreement remains unaffected and unaltered. The new shareholders must sign the deed and accept their duties and responsibilities stated in the agreement. They consent to adhere to the agreement and act in the interest of the organization and other respective shareholders.

Refer to the following examples to understand the concept better.

Example #1

Suppose Robert is an experienced investor who recently bought 30 shares in a telecommunications company Telecom-Biz. He gets a 10% ownership in the company's shares and the accompanying rights. Before his accession as the shareholder, Robert is asked to sign the deed of adherence. He communicates with his lawyer, who verifies the terms in the shareholders' agreement and the deed. Robert signs the deed and assumes the role post-confirmation from his lawyer.

Example #2

Suppose FineFin Ltd. is a financial institution that has recently gone public. When the initial enthusiasm for the initial public offering (IPO) had started fading away, the management anticipated that many investors were looking to sell their stocks in the secondary market. Therefore, the finance department requested the legal department to create a deed of adherence template so that they would be able to accommodate the regular changes in the equity holders.

The deed is a brief and concise document consisting of 2-3 pages. Here's a rough deed of adherence format.

1. Effective date
2. Parties to the deed (new shareholder and the company) and the respective addresses.
3. Interpretation clause
4. Background (a reference to shareholders' agreement).
5. Adherence clause
6. Representation and warranties
7. Notices
8. In Witness Whereof Clause
9. Signature of parties

The organization can add any other relevant information deemed appropriate by the parties. Many online sources and law firms offer downloadable templates that companies can buy at as low as $20. However, companies should consult their lawyer and draft the deed according to their requirements. 

A deed of accession and adherence are the same. An investor signs the deed of accession when they take up the role of a shareholder with exercisable powers in the company. Thus, the deed of accession, like that of adherence, adds to the shareholder's agreement.