What is a Joinder Agreement?
A Joinder Agreement is a legal document that binds a non-signatory to the terms of a separate contract. This attachment to an agreement simultaneously converts the non-signatory into an official party to the contract, while also making them legally responsible for fulfilling those terms. The common usage of a Joinder Agreement is to have it added as an amendment to another contract, allowing individual entities to be included with or added on to a contract after the fact. A Joinder may or may not be considered part of the original contract, depending on how the pre-existing contract is written and its requirements . A Joinder Agreement may require the additional entity to pay fees or fulfill obligations toward the existing contract, such as to ensure compliance with the terms of the pre-existing agreement. It may also allow for the new entity to purchase shares, purchase membership interest, and take stock in the overlying business or entity. Common uses for a Joinder Agreement are in business contexts, though this type of situation may also arise in connection with legal actions. A non-party may be brought into a case where the opposing party now has standing to seek relief, or a current party needs to add an additional, original party with whom it can share in the costs and the outcome of the case.
The Function and Significance of Joinder Agreements
In the broad landscape of legal agreements and contracts, few tools are as versatile or as underappreciated as the joinder agreement. They are particularly useful in business transactions where the introduction of new employees, investors, or other parties requires the previous consent of the existing parties. Such agreements provide a streamlined process for incorporating new stakeholders into established legal frameworks without the need to create new, separate documents for every addition.
The importance of joinder agreements cannot be overlooked in the context of mergers and acquisitions, corporate restructuring, or product development. These scenarios often involve a multitude of parties making a concerted effort to achieve a singular goal. When new entities come into play, their involvement can affect the applicability of terms and obligations for everyone listed on the original agreement. A joinder agreement thus facilitates a smooth transition in which obligations and rights are expanded to a larger pool of competent, qualified individuals or businesses.
Joinder agreements also play a vital role when a company or organization wishes to financially leverage investors, establish new partnerships, or hire individuals who will remain with the organization for an extended period of time. Employees who enter into confidentiality, non-compete, and other legal agreements must sign a joinder agreement as an extension of those already in place. This is also true for new investors and partners. In all these situations, the joinder agreement essentially acts as a bridge to the original contract, allowing the terms to expand with each new addition and protecting existing parties through additional signatures, thereby strengthening the entire venture.
With this in mind, it is clear that joinder agreements are essential in their ability to facilitate new entries into previously established contracts, including those involving confidentiality, non-compete, and non-disclosure language. The procedural ability to add names to the signature list of binding agreements without having to renegotiate terms with each new entry is invaluable for legal and business uses alike. In an age where global markets and a vast array of business interests necessitate regular changes to solidify new relationships, an agreement such as the joinder is not just important, but vital.
What are the Key Components of a Joinder Agreement?
A joinder agreement, sometimes referred to as a joinder instrument, is a relatively short agreement that sets forth the terms and conditions by which a person or new party becomes bound by an existing agreement. A joinder agreement can be found in many contexts, including, but not limited to, board and shareholder consents, loan and credit agreements, and pre-nuptial agreements. It is essential for a joinder agreement to state the agreement or agreement term to which it pertains (whether it be a membership, joint venture, loan, indemnification, or otherwise) so as to clearly establish the legal context within which the joinder agreement will be enforced. Furthermore, a joinder agreement should clearly identify the parties involved, including any individuals, corporations or other entities that will be bound by the agreement if it relates to an existing agreement. In addition, a joinder agreement should contain language which expressly states the intention of the parties to be legally bound by the agreement. A joinder agreement should contain language stating that the joining party consents to be bound by any "existing" agreement(s) and agree to be subject to the rights and obligations thereunder. Most joinder agreements contain some language to the effect that the joining party waives any rights to separately negotiate its interest or review or receive a copy of the underlying agreement(s). The joinder agreement may also set forth the rights and obligations which will accrue to the joining party through its entry into the agreement. A joinder agreement should clearly set forth the remedies available to the parties in the event that either party breaches the terms of the agreement. Further, most joinder agreements contain terms allowing for the assignment of rights under the agreement to any successors or assigns of the parties. Finally, a joinder agreement should be executed under the same formalities as other contracts and agreements of parties which are being joinded (such as board approvals, shareholder consents, and signatures) by all of the parties that will be bound by the agreement.
How Do Joinder Agreements Operate?
Joinder agreements are relatively straightforward when it comes to their practical application. When a joinder agreement is needed, there is typically an existing contract or agreement that the new party is meant to be joining. The joinder agreement is simply a means to facilitate the addition of this new party. The joinder agreement is executed by the new party and is typically written in reference to the other party or parties against which the new party will be joining. A well-written joinder agreement will incorporate the existing contract or agreement by reference.
As an easy example, consider the following: ABC LLC and XYZ LLC enter into a membership interest purchase agreement, which provides that ABC LLC shall acquire 60% of the member interests held by ZYZ LLC. Prior to the effectiveness of the membership interest purchase agreement, ABC LLC has execute a joinder agreement whereby ABC LLC agrees to be bound by the membership interest purchase agreement as if it were an original party thereto. XYZ LLC shall execute the joinder agreement for acceptance of ABC LLC that is executed by ABC LLC for acceptance by XYZ LLC, and shall return the accepted joinder agreement to ABC LLC. Upon receipt thereof and acceptance by XYZ LLC, this joinder agreement shall only be required to be maintained by ABC LLC as an official record kept by ABC LLC. As you can see, this is a fairly simple document but that helps to tie the new party into the original agreement without requiring any amendments or the like. If it is necessary to add requirements to the joinder agreement, such as criteria for the new party joining and the like, simply add them!
A Comparison with Related Legal Documents
Similar to many other legal instruments, joinders share certain characteristics with other legal documents, and often serve as substitutes or complementary additions to other legal instruments. For example, a joinder might briefly acknowledge and integrate a new or amended governing document that was prepared pursuant to other legal requirements to which current and new parties were subjected. In contrast to an amendment, which generally requires a signature or acknowledgement from all parties to the underlying agreement, a joinder typically requires only a signature from the new party or parties being joined to the transaction. A party that signs a joinder agreement can generally not later argue that it is not bound to the terms of the underlying document, though it may still object if specific state law or statutory provisions require express consent or joinder. This gives rise to the primary concern of the joinder—the risk that the new party might lack knowledge or understanding of its obligations with respect to the underlying document, and thus might not be bound by its terms or conditions .
Where amendments generally modify portions of the underlying agreement, and do so with a relevance or application that is limited to the extent of the amendments, a joinder operates as an incorporation of additional parties within the underlying agreement. A joinder also may operate as an incorporation of additional obligations under the agreement, which is generally limited to the obligations of the specific parties to the agreement. In contrast, an assignment generally conveys, not only specific rights under a contract, but also all rights. This contrasts with a joinder, which incorporates both the individual rights under the document, and the parties to the document. A joinder typically incorporates the obligors under the underlying agreement, whereas an assignment appoints a new obligor for the existing obligations. To harmonize these differences, an assignment can be executed as a "joinder and assignment," where the joinder effectively incorporates the new obligor along with the obligations thereafter assigned to that party. The joinder in this case may also be accompanied by an indemnification agreement signed by the assignor, assuming the joint liability for the future obligations of the document. Such clarifications help to create a cleaner, and more easily understood, assignment.
Common Situations for the Use of Joinder Agreements
Joinder agreements are most commonly used in the context of mergers and acquisitions. To conclude a deal, umbrella agreements are often prepared to outline the overall structure of a transaction, including how the various provisions (whether it is a loan or a sale of equity or assets) will work together. Typically, each item under the umbrella will have its own definitive agreement (such as loan documents or an asset purchase agreement); in that case, if a new party comes in, obtaining a joinder ensures that they are bound by the umbrella agreement even if they are not specifically listed as a party.
They can also be used in the context of partnership formations. For example, if it is a multi-party deal to form the partnership and each party has signed a partnership agreement, if a new party joins, a joinder would need to be executed by such party to bind them to the terms of the partnership agreement.
Similarly, they are often used when a borrower takes on additional debt. If multiple lenders are part of a borrowing group, each can individually execute the credit agreement with the borrower. In addition to those definitive loan documents, an umbrella joinder agreement can also be executed by principals and potential guarantors, binding them to those same terms in the credit agreement.
Preparing a Joinder Agreement
Joinder agreements are important to define the conditions that apply to a new party’s acquisition of an interest in an existing partnership, limited liability company or stock corporation. A joinder agreement is not required under any state law, and if one exists under a particular entity’s organizational documents, it may be imposed upon the new unitholder without negotiation. Drafting considerations should be made to ensure that the terms of the joinder agreement appropriately reflect the parties’ intentions and protect the company.
Joinder agreements typically include:
The drafting considerations here include whether the joinder agreement should also assign rights, such as distributions, generally given to unitholders, including voting rights, preemptive rights, inspection rights and the right to receive information regarding the company. This may be relevant in a redemption situation when a specific redemption is taking place. The parties may agree to an assignment of certain rights, but specifically exclude voting rights, in which case the company may want to obtain the right to approve the new unitholder’s appointment as its director. However, if strategic concerns are involved in the redemption, carefully consider the voting rights restrictions so as not to give up an advantage the existing unitholder wants. Investing new capital into the company may provide a good reason to relinquish certain rights in the interest of valuing the investment. Note, however, that the California Division of Corporations will not qualify a stock sale unless it is accompanied by the director’s consent to serve.
These examples are not meant to be exhaustive, but to outline some of the items to consider when drafting a joinder agreement.
The Legal Ramifications and Issues of Joinder Agreements
Despite their benefits, joinder agreements can sometimes lead to legal disputes. For example, a scenario might arise where there are conflicting provisions within a Joinder and the Master Agreement. Or, there could be an issue where a purchaser wishes to contest the validity of the guarantee offered by a parent company, leaving the seller to dispute the enforceability of the guarantee. Given the risk of disputes, it is essential to NOT use an identical form of joinder agreement when closing multiple transactions. Instead, each transaction should have its own customized joinder agreement, which is then incorporated by reference into each corresponding Master Agreement . Companies to whom the proceeds of a loan will flow, the companies that post a guaranty, and the companies whose assets are related to the intended use of the loan proceeds, should all be included in the joinder agreement process. Essentially, all parties that may have a claim against the lender should be included in the agreement. If a joinder and the Master Agreement contain conflicting provisions, it can usually be resolved by construing the disputed provisions in favor of the Master Agreement. This solution hinges on the non-exclusive remedy provision in the Uniform Commercial Code (UCC), however, which means that while the solution is preferred, it does not eliminate the risk that the applicable court would rule differently.