Whether in an acquisition or lease arrangement, most corporate law transactions are guided by tax considerations. Clients want to achieve their business objectives in a manner that minimizes the amount of tax payable as a result of the deal—and regularly reorganize their enterprises to operate in a tax efficient manner. This said, in most jurisdictions, a tax plan is only as good as its implementation. What that means is that the tax consequences of a transaction will depend largely on what took place according to the corporate law applicable in that jurisdiction.
While many corporate deals between unrelated parties end in a neat package of signed documents - however painful it may have been to get there - the bane of the tax lawyer is the corporate minute book of unsigned documents. Whether it is a simple resolution authorizing the payment of a dividend or a complex set of reorganization documents, oftentimes it is especially difficult to collect executed documents from clients in the context of transactions between related parties. Part of the trouble relates to the belief that documents can always be signed later - if a third party asks to inspect or rely on them.
Unfortunately for some clients, tax authorities have extensive powers to review, inspect and audit books and records. Free from many of the normal legal constraints governing search and seizure, auditors can require books and records to be produced upon demand. In serious cases, they can even conduct searches and seizures of books and records.
Where minute books have not been kept up to date with properly executed documents, enormous adverse consequences can arise. Unsigned or incomplete sets of documents may not be considered legally effective transactions. In those cases, dividends can be punitively treated as attempts by shareholders to divert value in an “off the books” fashion; a simple creditor proofing strategy might trigger unrealized gains on assets. In all cases, the result is the same—an unhappy client saddled with a big tax bill because something got missed.
As lawyers, we all have a duty of diligence to ensure client documentation is accurate and complete. That said, tax-driven transactions present unique considerations in light of the power of tax authorities to audit at any time. Electronic signatures, signature tracking and use of tools like a dynamic closing checklist make it easy for busy clients to sign documents and enable simple, accurate tracking of outstanding items. Accurate, simple and secure transactions not only make life easier – they can reduce the odds of an unintended headache.