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Reached an Important Agreement? Get a Lawyer to Record It in Writing

Agreements are frequently reached behind closed boardroom doors, but a failure to engage a professional to record them, contemporaneously and in writing, can cause serious problems down the line. That was certainly so in one case concerning the tax consequences of a corporate sale.

An entrepreneur and his family trusts disposed of their shareholdings in a thriving company. In return, they received shares in a corporate purchaser, which became the company's parent. The sellers asserted that, at a board meeting shortly before the transaction was completed, the company's directors agreed that the company would indemnify them against any tax liabilities and associated costs they might incur in consequence of the sale.

Such liabilities and costs did in the event arise and the sellers – together with the entrepreneur's wife, to whom he had transferred some of his shares – took action to enforce the agreement. The agreement had, however, not been committed to writing and the company denied that it had granted a legally enforceable indemnity to the sellers, in the terms alleged or at all.

The High Court noted that the absence of any reference to the alleged agreement in the transaction documents, board minutes and email traffic was striking and called for cogent explanation. However, in upholding the sellers' claim, it was persuaded by compelling evidence that an agreement had been reached and that an enforceable indemnity had been granted.

Amongst other things, the company had paid £3,135,816 to the sellers pursuant to the indemnity, before later claiming that no such indemnity had been granted. The terms of the agreement were also evidenced by a memorandum signed by directors who had been present at the critical board meeting about two years after the event. The Court rejected the company's argument that the indemnity could not have been validly granted without shareholder approval.

The company's counterclaim for restitution of the money already paid to the sellers was dismissed and, in order to give full effect to the indemnity, it was ordered to pay them a further £1,025,620.

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    If you want to make sure an agreement is honoured and will withstand a legal challenge, make sure it is recorded in proper form.

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    The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.