Given the increased use of electronic communications and the practical difficulties in gathering all necessary signatories in the same place, "remote" or "virtual" completions of transactions have become increasingly commonplace.
Where transactions involve deeds, specific rules on execution and delivery apply, which can give rise to issues particularly where there is a delay between signature and completion. This article looks at some of the issues and considers steps companies can take to manage the completion process.
Deeds are a common feature of corporate and other transactions, with their use ranging from transfers of land and powers of attorney to some share purchase agreements, shareholders' agreements and guarantees. The execution process for deeds is more formal than the process for entering into simple contracts. The document will need to be clearly identified as a deed, the signature or sealing requirements in the Companies Act 2006 and the company's articles of association will need to be complied with and the company will need to "deliver" the document as a deed. "Delivery" in this sense means an action or words indicating an intention to be legally bound. It is important to consider when delivery takes place as this will mark the point at which the company becomes bound by the deed, either unconditionally or subject to conditions.
When a deed becomes legally binding
Generally a deed will be presumed to be "delivered" by a company at the time it is executed, unless a contrary intention is proved. Where there is to be a delay between signing a deed and completion, it will therefore be important to make clear when the deed is intended to be delivered and whether it will come into effect immediately or subject to conditions.
These timing issues were highlighted recently in Silver Queen Maritime v Persia Petroleum Services (2010), a High Court case involving a settlement agreement entered into as a deed. At first the completion process followed a typical pattern, as the first party signed the deed and their solicitors sent it to the second party's solicitors requesting that it be signed and returned. However, before the second party had executed the deed, they received notice that the first party no longer wished to enter into the settlement and had withdrawn their agreement. This was ignored by the second party which went on to execute the deed and return it to the first party's solicitors.
One of the issues considered by the Court was whether the settlement agreement was binding on the first party or whether they had been entitled to withdraw from the transaction. On the facts the Court held that the first party had validly executed the deed and delivered it "in escrow", on the condition that it became fully binding once the second party had executed and returned a copy of it. The first party was not entitled to withdraw from the deed, which became fully binding once the conditions were satisfied.
Managing a delay between execution and completion
Anyone managing a transaction on behalf of a company, which involves a delay between signature and completion of a deed, may need to take additional steps to make the intended timing of the process clear. These could include:
- making it clear that the deed is not delivered on execution and giving authority to a third party (such as the company's solicitor) to deliver the deed at the appropriate time. In this case the deed will be capable of being withdrawn at any time before delivery. The arrangement should be clearly reflected in the documentation (in the execution wording, the company's board minutes etc); or
- executing and delivering the deed "in escrow" (so that the deed becomes irrevocable on execution and delivery, but does not take effect until certain conditions (often set out in an escrow letter) are fulfilled. This method is sometimes used to cover a short term delay where a technical procedural issue is outstanding; or
- where there are more significant outstanding issues, including conditions in the deed and/or an express right of revocation.
Leaving an executed deed undated will not necessarily prevent the company becoming legally bound from the date of signature.
The reminder in Silver Queen Maritime of the importance
of delivery in the execution process comes at a time of renewed
focus on practice for executing deeds, as a result of the
Mercury Tax Group case and subsequent "note on execution
of documents at a virtual signing or closing" produced jointly by
The Law Society Company Law Committee and The City of London Law
Society Company Law and Financial Law Committees. It is
becoming increasingly common for parties to consider and agree the
detailed execution arrangements in advance of completion and, where
legal advisors are acting on the company's behalf, it is advisable
for the execution process to be managed through them.
Any information contained in this article is intended as a general review of the subjects featured and detailed specialist advice should always be taken before taking or refraining from taking any action. If you would like to discuss any of the issues raised in this article, please get in touch with your usual Olswang contact. This article was included in our Olswang Corporate Quarterly Winter 2010/11 publication.