The Importance of the Memorandum of Understanding in Business Negotiations

Posted by basshopper on September 22nd, 2019

Despite being a key document for business negotiations, the memorandum of understanding is often ignored by most companies, either because they are totally unaware of their existence or disregarding their need.

We may consider the memorandum of understanding to be an agreement between two or more parties to settle the terms and details of a transaction and establish their rights and duties.

This document is a more formal version of a verbal agreement and should be used as the first step in signing deeper legal documents such as the articles of association and shareholders shareholders agreement.

Arrangements may be long, dragged out affairs. When the last arrangements have been gotten to, all of the arrangement styles and discussing strategies are done away with, and every person stands, drinks hands and also leaves the area, right? No! There is one more vital action in the entire negotiation procedure prior to you're done - you need to create a memorandum of understanding template.

Prior to the signature of the master agreement, the parties involved should use this document to outline the transaction objectives and the performance of the parties involved, defining future rights and obligations. Through the MOU (Memorandum of Understanding) it is possible to record the free expression of the parties about the business objective in order to avoid any doubts and vices in the formation of the legal business.

The main intention in signing such an understanding is to record the facts surrounding the negotiation, specifying the points upon which the agreement is based. It is therefore important for the parties to document each of the terms of the understanding so that the guidelines are determined from the outset.

But the importance of the memorandum goes beyond simple understanding between the partners of a company, as it can also be used to exchange public information and transfer sensitive information.

As is well known, the conclusion of contracts is preceded by lengthy negotiations. After the initial negotiations, all the conclusions of each step of the transaction should be summarized in the memorandum, which, in this case, will exercise the legal condition of a preliminary contract.

The preliminary contract broadly creates an obligation to conclude another future contract. That is, it does not create substantial effects, but rather an ancillary obligation to conclude a future legal transaction, the object of which is the granting of a definitive contract.

Article 462 of the Brazilian Civil Code provides that the preliminary contract must contain all the essential requirements of the contract to be entered into, except as regards the form of the main contract.

Therefore, the MoU cannot be used as a definitive contract for the company's dealings, but only as a document prior to other more elaborate contracts. For this reason, this document can be considered a strategic security for the operations of the entrepreneurs involved;

The MoU can also be used in more sensitive operations, such as investment, acquisition of equity interest, mere call option, among others. In addition, it may serve as a more formal version of a verbal contract, which was based on mutual understanding between the parties of their rights and responsibilities.