What is a Deed of Adherence

A Deed of Adherence is used when a new shareholder joins a company with a shareholders’ agreement already in place.

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Deed of Adherence meaning

A Deed of Adherence is a legal document utilised in the context of corporate agreements, particularly concerning shareholder agreements or investment agreements. When new shareholders join a company that already has an existing shareholder agreement in place, they are often required to agree to the terms of this pre-existing agreement to ensure uniformity in the rights and obligations of all shareholders.

The Deed of Adherence serves as the mechanism through which these new shareholders agree to be bound by the terms and conditions of the existing shareholder agreement, effectively becoming a party to that agreement.

By executing a Deed of Adherence, the new shareholder becomes a party to the existing Shareholders’ Agreement, and is bound by all the terms of that agreement.

Who needs to sign a Deed of Adherence?

A Deed of Adherence should be signed by any shareholder joining a company that has a shareholders’ agreement already in place. This means that if you are investing in a company or buying shares in a company, you should ask if there is a shareholders’ agreement already.

What are the main issues for a company when signing a deed of adherence?

Getting a new shareholder on board can be exciting for both new and existing shareholders. But it is important to remember that both parties have their own interest. One of the main issues that can arise for a company when signing a Deed of Adherence is a conflict with the new shareholders regarding the terms of the shareholder’s agreement.

Depending on the leverage they hold, investors can try and get their way around existing shareholders’ agreements which might not always be agreeable with the shareholders.

When is a Deed of Adherence used?

A deed of Adherence is a supplementary legal document that is used to bind a new party or shareholders in a company to the existing shareholder’s agreement. This is applicable when the shares have been acquired from existing shareholders as well as when one subscribes to new shares in a company. 

What does the scope of adherence in a Deed of Adherence refer to?

The scope of adherence in a Deed of Adherence typically refers to the extent and limitations to which a new party agrees to comply with the terms and conditions of an existing agreement, usually in the context of a partnership or joint venture.

When a new party joins an existing agreement, such as an investment fund or a business partnership, they sign a Deed of Adherence to indicate their agreement to be bound by the original contract’s terms.

What are the key elements of a Deed of Adherence?

Some important clauses to look out for in a Deed of Adherence are:

  • Background Information: details such as names and dates of the related companies are mentioned here. It should mention whether the shares have been transferred or new shares issued. 
  • Interpretation: The main terms that are used in the agreement are mentioned here.
  • Adherence: This clause mentions that the new shareholder has received and agrees to be bound by the shareholder’s agreement.
  • No release: This is an important clause if a share is being transferred, as it holds the transferor accountable for any liability he is tied to. For new shares, this section does not apply.
  • Law and jurisdiction: the regional laws governing the document must be specific. 

What are the benefits of using a Deed of Adherence?

Using a Deed of Adherence offers several benefits, especially in complex business arrangements like joint ventures, partnerships, or investment funds. These benefits include:

  1. Ease of Adding New Parties: A Deed of Adherence provides a straightforward mechanism for introducing new members or partners into an existing agreement without the need to renegotiate or redraft the original contract. This simplifies the process of expansion or restructuring.
  2. Consistency in Agreement Terms: It ensures that all parties, both existing and new, are bound by the same terms and conditions. This consistency is crucial for maintaining the integrity and stability of the agreement.
  3. Legal Clarity and Certainty: The Deed of Adherence clearly outlines the obligations and rights of the new party, reducing the potential for legal disputes. It provides a clear legal framework that can be referred to in case of misunderstandings or disagreements.
  4. Protection of Existing Parties: For the original parties, a Deed of Adherence protects their interests by ensuring that any new party adheres to the pre-agreed terms. This means that the fundamental principles of the agreement are not compromised by the addition of new members.
  5. Flexibility: It allows for the dynamic nature of business relationships, where new parties can be integrated into existing agreements with relative ease. This flexibility is particularly advantageous in rapidly changing business environments.
  6. Efficiency in Management: By using a Deed of Adherence, the administrative burden of managing multiple, potentially varying, agreements with different parties is reduced. There is a single, unified set of terms and conditions that governs all parties’ relationships.
  7. Risk Management: It helps in managing risks associated with new parties joining an agreement. By clearly defining the scope of adherence, it ensures that new entrants understand and accept the risks and responsibilities involved.
  8. Streamlining Succession and Transfer Issues: In cases of business succession or transfer of interests, a Deed of Adherence can facilitate a smoother transition by pre-defining the terms under which such transitions occur.

Overall, a Deed of Adherence is a practical and effective tool for managing multi-party agreements, ensuring legal compliance, and maintaining the continuity and integrity of business relationships.

What information does the Deed of Adherence need to add new members?

A Deed of Adherence is a relatively simple document. Usually, it is present in form of a deed poll. Here, only the signature of the shareholder is required. There might be some instances where the signature of the company is also needed. 

A Deed of Adherence records the parties between which the agreement is signed. It identifies whether a shareholder is an individual or a company. If it is an individual, it requires information about the individual and their signature. Sometimes, a witness may also be required. If the shareholder is a company, then the company’s director is expected to sign the deed of agreement.

What is a Deed of Accession?

A Deed of Accession is another name for a Deed of adherence.

What is the difference between a Deed of Accession and a deed of adherence?

A Deed of Accession and a Deed of Adherence are the same in their purpose and function within corporate and legal frameworks. Both documents are used to integrate new parties—such as shareholders, partners, or members—into an existing agreement without the need to draft a new agreement.

Advantages of Including a Deed of Accession in a Shareholders Agreement

The Deed of Accession is most important in allowing new shareholders to be equal to the existing shareholders in terms of responsibilities as well as benefits. Apart from this, it is quite advantageous to have a Deed of Accession in a shareholder’s agreement as the terms of a Shareholders Agreement are only binding to those who sign it and so a deed of accession will ensure that all new shareholders get the same treatment.

Further, deeds of accession save resources. Drafting a new shareholders agreement each time a new shareholder is incorporated can be a painstaking task, it can take up time and money. With a Deed of Accession, there is no need to draft a new shareholders’ agreement each time a new shareholder comes on board.

Deed of Adherence Vs. a Shareholders Agreement

An Agreement for Shareholders is a contract between all of the main shareholders of a company to regulate their relationship, determine how shares are controlled, and govern the way executives run the business.

Drafting and agreeing to a new Shareholders’ Agreement is not usually needed for one additional shareholder. To quickly agree on the same terms, a company uses a Deed of Adherence which is a short document signed by all the original parties and the new incoming shareholder.  This way, there is no need to re-draft the Shareholders Agreement each time a new investor joins the company and wants to become a shareholder.

By executing a Deed of Adherence, new shareholders become a party to the Existing Shareholder’s Agreement and are bound by all the terms of that agreement.

Deed of Adherence template

The deed is a short-form agreement between all the original shareholders and the new incoming shareholder, which makes it legal as if the new shareholder had signed the original agreement.

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