Drafting Company Transfer Agreements: Common Mistakes and How to Avoid Them

Jun 24

Real Case: Mr. T’s Company Faced Trouble Due to an Unclear Transfer Agreement
Company A, managed by Mr. T, conducted a full transfer of its shares to partner B. After the agreement was signed, Partner B discovered that Company A had outstanding unpaid tax liabilities and demanded Mr. T take responsibility. However, the transfer agreement did not clearly specify how to handle existing financial obligations, leading to a dispute between the two parties.

Mr. T believed the responsibility lay with Partner B after the transfer, while Partner B insisted that Mr. T was still accountable. The prolonged dispute disrupted the business operations of both companies.

Common Mistakes in Drafting Company Transfer Agreements

Unclear allocation of existing financial obligations: Many contracts fail to specify which party is responsible for unpaid debts or taxes, leading to future conflicts.
Lack of dispute resolution clauses: Contracts often lack clear provisions on how disputes will be resolved (e.g., arbitration or court), making conflict resolution more complicated.
Use of inappropriate contract templates: Using foreign templates or those not aligned with Vietnamese law may render the contract unenforceable or invalid.
Failure to conduct thorough due diligence: Skipping legal and financial due diligence before the transfer may result in the buyer inheriting hidden liabilities.
Unspecified timeline for transfer of rights and obligations: Contracts without clear terms for when ownership and obligations shift can cause ambiguity and disputes.

How to Avoid Mistakes and Implement Effective Solutions

Conduct thorough legal and financial due diligence: Before signing, assess the company’s legal status, financial position, taxes, and obligations to identify potential risks.
Draft a clear and detailed contract: The agreement should explicitly address:
- Responsibility for pre-existing financial obligations.
- The exact date and method of transferring ownership and liabilities.
- Methods for resolving disputes.
- Commitments and warranties by both parties.
Use clear and understandable language: Avoid legal jargon or ambiguous terms to ensure all provisions are easily understood and minimize misinterpretation.
Consult experienced legal professionals: Engage with lawyers specialized in M&A to draft a compliant and well-structured agreement that safeguards all parties’ interests.

Conclusion

Drafting a company transfer agreement requires meticulous attention and a deep understanding of both legal principles and business realities. By recognizing and avoiding common mistakes, businesses can ensure a smooth transfer process, reduce risks, and protect their legal rights.

DEDICA Law Firm, with its team of seasoned M&A lawyers, is ready to support your business in conducting due diligence, drafting transfer agreements, and resolving any arising disputes