The Essentials of Joinder Agreements: An In-Depth Exploration

A Definition of Joinder Agreement

Joinder Agreement Defined – a joinder agreement, also known as a deed of adherence, is a legal document that establishes the obligations of a new party to an existing agreement. A joinder agreement is typically made to be bound by the terms of a contract among multiple parties.
In the transaction of a business, the business entity may be required to enter into a legal contract with multiple parties. When one of the original parties is removed from the contract, or a new party is added, it is referred to as a transaction, and a joinder agreement must be created to adapt to the change(s) . In many legal cases, these changes in parties require either a short form joinder agreement or an individual joinder agreement.
The joinder agreement serves as an attachment to the original agreement and must be signed by the new party. In most cases, the original contract will be attached along with the joinder agreement, but in the event the two documents are not the same (as is the case with the sale of a business), the joinder agreement will contain all of the necessary clauses in the original.

Joinder Agreements and Their Role In Business Transactions

Joinder agreements are vital in a variety of business situations. In private equity transactions, joinder agreements usually accompany a purchase or merger and acquisition agreement and are used to document the consent of defined parties to be bound by the agreements to which the company is a party. Similarly, in franchise settings, joinder agreements are executed if a franchisor is providing services or selling products to a distribution network, because they obligate the distributor or participating franchisee to adhere to the main franchise agreement.
These agreements ensure that existing legal relationships and interpretations by participants under the master agreement are consistent with the new party, thereby providing an added layer of assurance that all stakeholders understand the parameters under which the underlying business arrangement is being carried out. A well-drafted joinder should be consistent with the core agreement, and LGBT business owners should work with competent counsel to ensure this is achieved.

Essential Components of a Joinder Agreement

A joinder agreement generally incorporates common key terms and conditions, although its exact contents may be dependent upon the nature of the transaction and the parties involved. In most circumstances, the following aspects can be found in a joinder agreement: The parties – All new investors or parties agreeing to be bound must be identified in the agreement – along with the original parties – to be brought into a contract or shareholders agreement and effectively be bound by the same terms. Agreement to be bound – The joinder must include a confirmation that the new party is duly admitting to the agreement and will be bound by the terms and conditions therein. Obligations – This section of the agreement formalizes the obligations that the new party agrees to perform under the existing contract, which could involve a payment of capital or other contribution to the company. Representations and warranties – The new party must represent and warrant to the existing parties that they have the authority to enter the agreement and any additional assurances necessary for the original obligations of the original parties to remain intact. Statement of share ownership – If applicable, this part of the agreement outlines the number of shares that are being acquired by the new investor (if applicable) and any other relevant information regarding their status as an owner of the corporation.

The Process of Establishing Joinder Agreements

A joinder agreement is generally a short and simple instrument. It works in just about the same way as any other contract would and is nothing to be intimidated by. The first thing to understand is that a joinder agreement is typically executed in conjunction with something else (such as the original operating agreement or amendments to the operating agreement) that both requires the joinder agreement or is referenced in the joinder agreement. Therefore, even though the joinder agreement may be short on its own, it can have significant impact on the other document with which it is executed or referenced.
The most basic form of a joinder agreement looks like this:
Upon the execution of this Joinder Agreement, _____ (the "Joinder"), joins _______ (the "Company") as a member of the Company and agrees to be bound by the terms and conditions of the Amended and Restated Operating Agreement dated as of ___________ (the "Operating Agreement") of the Company and Exchange Act Compliance Trust LLC, a Delaware limited liability company, as amended from time to time (the "Trust"), a copy of which has been provided to the Joinder and such Joinder accepts and agrees to all terms contained therein as if he, she or it had signed the Operating Agreement directly.
Joinder Name:
Signature: ____________________________
Print Name: ____________________________ Title: _______________________________
Very succinct and to the point, this language includes:
This will lead us into a discussion of the other document or documents that a joinder agreement will typically call out. If you were to pick a random joinder agreement up off the street where could it take you?
Most likely, the answer will be back to the operating agreement itself or the prior amendments to an operating agreement. This is typically when an existing member of a company creates an obligation for new members to agree to be governed by its operating agreement. The cost of entry is agreeing to be bound by its operating agreement or amendments to its operating agreement that are already in place.
Now that we’ve covered the very basics, what happens next? Any number of things can happen here. You might have a buy-in that has been negotiated; you might have some documents that still need to be drafted; you might have to amend the operating agreement to address additional collateral materials that have become part of the transaction (such as subscription agreements, trusts, and dropdowns). Or, you might just have a one or two addendum to the existing operating agreement that needs to be done and that is all that comes of it. Other times the documents are evolving and the deal is much larger, and there is many different parties. In those instances it may be sensible to establish an overall structure or program agreement that will govern each of the joinders that come in after the original program agreement has been executed.

Case Examples and Practical Applications

Frequent readers of this blog will have seen references to the 2016 Battersby case. The decision dealt with a number of issues, some of which are directly applicable to the use of joinder agreements.
The employees in this case were shareholders of the employer. They left to work for a competitor with the employer’s confidential information. The judge granted interim relief which restrained the employees from working for the competitor. The judge also placed restrictions on the competitor as a result of its involvement in the breach of the employees’ confidentiality obligations.
An interesting aspect of this case was dealings between the employer and the competitor prior to the employees’ departure. In one sense, the competitor had received the cleansing it would have liked . However, the restrictions imposed went well beyond what might be seen in ordinary circumstances.
Another feature is that the employer had contractual rights to require that officers and employees sign joinder agreements. It could have protected itself by requiring that all new shareholders to the company sign joinder agreements. The employer chose not to go that route. In other words, it lost its shareholder cleansing opportunity because it chose not to seek to adopt joinder agreements.
This was an important finding because the case demonstrates one of the considerations in deciding whether to enter into the joinder agreements. Cleansing prior misconduct can be good, but in other circumstances may be unnecessary. Although the chance to cleanse prior misconduct is appealing to an employer, it has to be kept in mind that it comes at a cost.

Legal Implications and Considerations for Joinder Agreements

The primary legal consideration that should be kept in mind is that joinder agreements are contracts. Therefore, the most important best practice for drafting a joinder agreement is that the parties to it have actually agreed to be bound by its terms. Many times, joinder agreements are included in purchase agreements. If the agreement does require, for instance, that all sellers in a property enter into a joinder agreement should one or more of them wish to sell their ownership interests, that requirement will not be enforceable. An agreement to be bound by a joinder agreement must be an independent agreement. Moreover, it is not enough that a seller has agreed to enter into a joinder agreement in the purchase agreement. The joinder agreement must actually signed by the seller irrespective of the expiration of the purchase agreement, a recent California case held. When product suppliers do require that their customers enter into joinder agreements, they typically require that the agreement be executed contemporaneously with an amendment to an existing supply agreement. The joinder agreement should be a short and simple document requiring only the joinder of the particular product supplier. It should incorporate by reference the requirements of the principal agreement or the purchase agreement to which the joinder relates. Any changes to those requirements, i.e., the existing requirements are not acceptable, should be expressly stated, without any ambiguity. Care should be taken to make sure that the limitations on liability in the joinder agreement do not conflict with the limitations on liability in the principal agreement or the purchase agreement. Those limitations should be harmonized to the extent possible.

Common Questions About Joinder Agreements

1. What is a Joinder?

A Joinder (also called an Acceptance of Joinder) is a contractual mechanism used in trust and LLC formations to bind the beneficiaries of a trust or members of an LLC to the pre-existing terms of the trust or LLC.

2. Why is a Joinder Necessary when Creating an LLC or Trust for Multiple Members/Beneficiaries?

Joinders are necessary when there are multiple members or beneficiaries of an LLC or trust in order to properly bind all members and beneficiaries to the terms of the trust or LLC.

3. Do All Members of an LLC Need to Sign a Joinder?

Yes, all members of the LLC need to sign a Joinder to become bound individually to the terms of the LLC .

4. Do All Beneficiaries of a Trust Need to Sign a Joinder?

No, not all beneficiaries of a trust are required to sign a Joinder to be bound to the terms of the trust.

5. How do I Find Out If I Need to Sign a Joinder to Become a Member of an LLC or Beneficiary of a Trust?

It is best to ask the LLC members or trustee of the trust.

6. Am I Already Bound by a Joinder If One Has Already Been Signed for the LLC or Trust?

If you signed a Joinder when the trust or LLC was created then you are bound by that Joinder and you do not need to sign another Joinder to be bound by the terms of the trust or LLC.