Shareholders Agreements often attach a form of a document entitled a ‘Deed of Accession’. Many people do not understand the purpose of this document or when it should be used. In this article, we explain exactly what a Deed of Accession does and when it should be used.
What is a Deed of Accession?
When the original shareholders set up a company, they generally enter into a shareholders agreement. The shareholders agreement sets out the relationship between (a) the company and the shareholders, and (b) the shareholders as amongst themselves. It also incorporates many other provisions including the following:
- The roles and responsibilities of the directors, the shareholders and the key people involved in the company;
- How board meetings should be held, including director’s voting rights;
- How general meetings should be held, including shareholders voting rights;
- How new shares should be issued (including any right of first refusal);
- How shares should be sold (including any right of first refusal);
- How board deadlocks should be resolved; and
When new people invest in the company, they are issued with shares and become shareholders. They are not automatically bound by the provisions of the shareholders agreement, but they somehow need to be so that the provisions that apply to all of the original shareholders also apply to them.
This is where the Deed of Accession comes in. A new shareholder (which is not a party to the shareholder agreement) can sign a Deed of Accession to the shareholders agreement. Upon signing the Deed of Accession, the new shareholder will be bound by the provisions of the shareholders agreement as if it was a party to it. The Deed of Accession should ideally be signed as soon as the new shareholder becomes a shareholder so that it is instantly bound by the terms of the shareholders agreement.
What is the benefit of a Deed of Accession?
The great thing about a Deed of Accession is that it avoids the parties having to sign a new shareholders agreement every time a new person purchases shares in the company. Instead, each new shareholder simply signs a short Deed of Accession whereby it agrees to be bound by the terms of the existing shareholders agreement.
It is a great benefit to have a form of Deed of Accession attached to your Shareholders Agreement. This will save on legal fees as you will not need to have a new shareholders agreement drafted each time a new investor comes on board. Instead, you can insert the investor’s details into the Deed of Accession and arrange for them to sign it as soon as they become a shareholder.