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The Secret That Lawyers Won't Tell You

Group Reorganisations

Intercompany Agreements

1 June 2017

This article appears in the June issue of our International Corporate Structures newsletter.

Imagine you’re buying your next Mercedes S-Class. You think you’d like the wheelbase to be 10 cm longer than standard, so that you can fit your longboard windsurfer on the top … and so that you can give your mother in law a little more legroom in the back. And you would like bigger wheels, because your front drive is steep and can get rather muddy in the winter.

Would this be possible? Of course it would. No doubt you can find a workshop which could make those changes for you. But you would be likely to sacrifice a great deal in terms of reliability, safety and fuel efficiency. Because when you buy a car like an S-Class, you benefit from hundreds of thousands of hours – and perhaps decades – of research and development, and any complex product is an ecosystem of interrelated functionality. (See infographic of the history of Daimler AG and the Mercedes brand.)

The same applies to other products such as software. When new versions are released by even the best-resourced developers like Apple and Microsoft, many users prefer the wait until the new release has been tested in the community before clicking the button to install it.

Legal agreements and legal structures are very similar – and this is one of the secrets that most lawyers won’t tell you, because most of them are in the business of selling hours. Legal agreements rarely work in isolation, and in a group context the provisions of one agreement will often have implications for a range or related agreements and structures. Although it may seem like you are getting a premium service by hiring an army of lawyers to create a bespoke or novel structure, the end result can actually be less robust. This is simply because the more bespoke an arrangement is, the less it benefits from incremental changes over time, and the more it is at risk of human error. And of course, the risk of human error increases exponentially when the “bespoking” is done by junior lawyers late at night or in the early hours of the morning. This kind of scenario gives rise to howlers, such as securitizations with no security granted, and Eurobond listings where the bonds are not validly issued.

This is why at LCN Legal we pioneered the publication of template intercompany agreements back in 2013. (And why we are now taking a step further by making available a “toolkit” of resources for intercompany agreements – click here for further details.) Of course, no product or system is perfect. And we are certainly not advocating a “one size fits all” approach. But, all other things being equal, a set of documents which benefits from the feedback over time of a community of professionals and users, is likely to be more robust.

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Article by
Paul Sutton
LCN Legal Co-Founder

Free Guide: Effective Intercompany Agreements for TP Compliance