Introduction to Transactional Law
Transactional law refers to the practice area that pertains to the preparation and implementation of a wide range of contracts across many different types of industries. These contracts include any kind of legally enforceable agreement or exchange between at least two entities. The transactions covered under this practice area can be either business-related or personal, with both common and unique elements from case to case.
Legal professionals specializing in transactional practices are often designated as business lawyers or corporate lawyers, and their work often takes the form of contracts such as licensing agreements, revenue sharing agreements, settlement agreements, nondisclosure agreements, and general terms and conditions . They may also conduct due diligence reviews, business valuations, merger and acquisition agreements, and a multitude of other deal-making minutes of a business’s growth, development, and evolution.
The primary goal of a transactional lawyer is to provide the necessary knowledge to help businesses and individuals avoid potential legal issues by drawing up legally sound contract terms and conditions. This legal practice area is considered "front-end work" because it focuses on preventing conflict from arising in the future, rather than on resolving disputes that have already happened; this differs from litigation, which is a legal practice area that typically deals with a client who wishes to seek resolution on a dispute via the court system.
Business Transactional Law
Corporate transactional law is a subset within business transactional law, and is also concerned with the steps involved in business formation. Corporate transactional law deals with the merging of corporations, or with acquiring companies. This area of transactional law is focused on the legal nature of companies, and how the law governs their formation and interaction with other companies.
As with general business transactional law, corporate transactional law deals with contracts, and lawyers work to create the most favorable legal outcome for their clients. For example, if Company A is going to merge with Company B, the lawyer for Company A would be involved in the creation of a merger agreement that defines the rights and obligations of all parties involved. The actions of the corporations are constantly being controlled by the terms of this agreement.
Likewise, the creation or dissolution of corporations are highly structured legal transactions. A lawyer would be able to help prospective business owners with the creation of a new corporation as well as the future termination of it.
Real Estate Law and Transactions
Typically, real estate transactional law encompasses the buying and selling of real property, leasing of real property, financing real property, and development of real property (e.g., land use) whether raw or improved.
The legal work performed for each type of transaction varies, but often includes the drafting, negotiation and execution of contracts, leases, closing documents, easement documents, and the like. For instance, land purchase transactions often require a title policy and survey (and corresponding title and survey review and analysis), which are obtained at the closing of the transaction (i.e., either at the closing of the purchase/sale transaction or at the closing of the construction or mortgage financing).
Some real estate transactions may require the execution and perfection of security instruments (e.g., deeds of trust, mortgages, or otherwise) given the financing or security needs of the purchaser/borrower and/or seller/lender.
Finance, Securities and Transactions
Finance and securities transactions are a critical aspect of corporate law. The process of raising capital, issuing securities and complying with various regulations can be quite complex. Different rules apply depending on the company’s country of incorporation (if foreign), the type of investment and the jurisdiction in which the company invests or issues the securities.
The types of securities that are often issued by companies. A corporation may issue several different classes of equity securities. Dividends, liquidation and voting rights may vary among the classes. Preferred stock is often used in private offerings to investors to afford them more rights than those that hold common stock.
Private placements are also exempt from registration under the Securities Act if they are made to accredited investors or sophisticated investors. Any offerings to U.S. persons that do not meet an exemption require registration. Going public is a major undertaking, not to be taken lightly. It is advisable to work with a firm experienced in SEC filings and issuances.
Another form of regulation takes place when U.S. persons invest in a foreign entity. These transactions are subject to regulations under the Foreign Account Tax Compliance Act (FATCA). Under FATCA, foreign banks, brokers, insurance companies, hedge funds and certain other foreign entities are required to report information regarding foreign investors that own U.S. securities. If not, the income is subject to a 30 percent withholding tax.
Foreign investments in the U.S. are subject to different rules and regulations than domestic U.S. strategies. Real Estate Investment Trusts (REITS) must comply with Internal Revenue Code Section 856, which imposes a number of constraints. When issuing interests to foreign investors, the agreements should state whether they will be treated as partnership or corporation for U.S. tax purposes.
Intellectual Property Law and Transactions
The most common types of transactions involving the transfer of intellectual property are licensing agreements, technology transfers, and intellectual property purchases. License agreements enable the licensor (the person granting a right to others) to grant a licensee (the person receiving a license) permission to use the licensor’s intellectual property (such as technology, software, other inventions, and trademarks) in an authorized manner. This can be an exclusive or non-exclusive right.
Some IP licensing agreements are for IP farm transactions, that is, a person licenses his or her entire farm of IP assets to another person at one time. Or, if certain IP rights are to be transferred, the parties may decide to use an IP transfer agreement. For example, a person can transfer rights in a patent or copyright under a technology transfer. Transfer agreements may require royalty payments, but they are simply contracts by which the rights in question are passed from one party to another.
A company may choose a purchase transaction in which a person employs an attorney to file a trademark application for a specific product or service, and then assigns the application to the individual’s company. The individual will then hope to obtain a federal trademark registration for the trademark. However, the mark must first be used in commerce before an application can be filed.
Commercial Agreements and Contracts
These agreements include a typical "letter of intent" which contains certain material terms which are common in ensuing contracts, such as the ability to get financing, right to complete a study or due diligence, adequate insurance, payment of fees and expenses, and obtaining approvals. The letter of intent would stipulate that negotiations were "subject to" formal ratification by each party or conditions precedent. The ultimate contract that is usually executed and this is frequently the purchase, sale or conveyance of real property and all terms of the agreement plus any additional terms become the contract . Such a contract may be the final word but sometimes it is the beginning of another round of renegotiation or modification. Not only do transactional lawyers have the above responsibilities, they must also make sure that the contract particularly with regard to conditions precedent, jury trial waivers, material breach, breach of covenants or representations, make sure that the contract complies with various rules or regulations, take care of payment and credit terms and more.
Transactional Tax Law
A transactional lawyer must also have a significant understanding of tax, estate and gift tax, as these types of taxes are important. The goal of good tax planning is to make a transaction as tax efficient as possible. A transactional lawyer will work with a client and try to make a transaction as tax efficient as possible while complying with the various requirements of the US and state tax laws. A transactional lawyer will create an entity for a client to use for a transaction to achieve tax efficiencies. For example, one way a business can be organized is by using limited liability companies, partnerships and S- or C- corporations. Each of these types of entities has differing tax implications for federal and state taxes. For example, if a business is organized as a C corporation, the business will pay income taxes on profits. When the taxed profits are then paid out as dividends to shareholders, there is also a tax on those dividends to the shareholders. This multi-level taxation can be avoided by organizing the business as an S corporation or partnership. However, an S corporation or partnership may not be as well suited for an initial public offering. A transactional lawyer must analyze the goals of the business and what the client wants to get out of the deal to determine the right type of entity to use for the transaction. A transactional lawyer must also be aware of and comply with various US and state tax laws. A failure to make proper disclosures could result in significant penalties being imposed by state revenue departments and the IRS.
Current Trends in Transactional Law
There is also a growing trend toward digital transactions. There are now many ways to complete transactions electronically, without the need for (or even possibility of) pen and paper. Websites such as e-Sign or HelloSign allow individuals to sign documents, send documents, obtain signatures, and store and send completed transactional materials, all electronically and with the assurance of security and confidentiality. Some transactions are now set to permit signature on a screen, much like you might sign your name on a credit card screen payment terminal. All of these advances in digital capabilities open up new dimensions in commercial dealings, as they allow parties who may never meet in person to complete transactions electronically at any time of the day or night. A further trend in transactional law is the automation of document preparation. Many law firms and companies now use systems that provide enhanced templates into which can be fed various data, such as the names of the parties to an agreement, or the amount of a transaction, and which automatically adapt to provide the preferred or required language in which a particular transaction must be documented, while at the same time reducing the possibility of human error, and reducing the time, expense, and labour associated with a large number of transactions. Some systems, rather than relying on template documents, offer the ability to complete or revise transactional documents through an interactive question-and-answer format. The author, or someone knowledgeable about the type of transaction, answers a series of questions, which may be set out by the system or by the author, and in response the system modifies the documents accordingly. At the end of the process, either the documents are ready for execution, or the author must review the documents to ensure that each point has been addressed as desired. These new developments in transactional law, in which technological advances have been harnessed to improve the efficiency, scope and accuracy of transactions, also involve privacy and security concerns. For example, many business transactions today are done using smart phones and other mobile devices. That means that a right of first refusal on the sale of a parcel of land, or the decision of a company to issue new shares, may be negotiated using smart phone applications or other electronic media that allow each side to examine its offer and counter offers, send messages and documents back and forth, and obtain signatures from the other side. This kind of mobile convenience has never before been possible, and the sophistication of the technology may obscure its limits, at least in the short term. Such developments must be monitored, in order to ensure that legal requirements are upheld, protections around transactional agreements acknowledged, and the impact of court actions and police investigations on such transactions understood.
Conclusion and the Future Trends of Transactional Law
The various sub-disciplines of transactional law have long been cornerstones of the practice of law. As the economy continues to evolve, transactional attorneys will find themselves undergoing significant changes to law practice in general, and the transactional sector in particular . New laws, regulations, and market forces will continue to present both opportunities and challenges across all industries, and transactional lawyers are best suited to provide creative solutions to these business and legal challenges.