A Memorandum of Understanding (MoU) is an agreement entered into between parties who have agreed to enter into a contract. However, at the stage of an MoU, in most circumstances, the terms and conditions (formalities) between the parties are yet to be decided/negotiated. An MoU is generally made in order to broadly outline the obligations between the parties at the time of initial discussions. It mainly gives out the intention of the parties, before the deal is officially signed between them. In most cases, no specific rights are granted by way of an MoU.
A Memorandum of Understanding describes the intention of the parties. It outlines a common understanding of the parties, in order to avoid any possible foreseeable point of dispute or in order to work in consensus. It is necessary as it formalizes the first level of discussions between the parties and forms as a basis for making a formal contract later on.
It should consist of all the necessary terms and conditions. The following are important terms that must be included in a Memorandum of Understanding among others:
The relevant personal details of the parties such as full name, residential addresses and ages of the parties to the MoU,
Purposes and goals for which the MoU is being signed
Meeting and reporting plans, if any
Obligations or responsibilities of parties
Financial considerations
Duration of the MoU
General clauses such as termination of MoU, applicable laws, indemnity clause, arbitration clause, etc.) and
Date of signing of the MoU.
DRAFT OF MEMORANDUM OF UNDERSTANDING
ABC and XYZ.
Re: ____________________________ Pvt. Ltd.
THIS MEMORANDUM OF UNDERSTANDING made on this ____________day of _____________between ABC having his office at__________________, India hereinafter referred to as "ABC" (which expression and the expression "ABC Group" shall unless it be repugnant to the context or meaning thereof mean and include himself and the present other shareholders of __________________Pvt. Ltd. and their respective heirs, executors, administrators and assigns) of the One Part and MR. XYZ having his office at_____________________. (Hereinafter referred to as "XYZ" which expression and the expression "XYZ Group" shall unless it be repugnant to the context or meaning thereof be deemed to mean and include himself and his nominees to the extent specified herein and their respective heirs, executors, administrators and assigns) of the SECOND PART;
WHEREAS, ABC is one of the founding shareholders and is Chairman and Director of a company incorporated in India known as ______________ Pvt. Ltd. hereinafter referred to as "the Company" which is in the process of setting up an internet portal, relating to ___________________, known as "__________________";
AND WHEREAS, ABC and certain other persons have advanced sums of money to the Company in respect of which shares have been/are to be issued to them and this group is for the sake of brevity referred to as the "XYZ Group";
AND WHEREAS, XYZ has agreed that he and his nominees (for the sake of brevity referred to as the "ABC Group") will invest an amount of Rs.__________________ /- (Rupees _______________Only) to acquire ____ of the Capital of the Company on certain terms and conditions and equity shares of the Company will be issued to the members of XYZ Group accordingly;
AND WHEREAS, the parties hereto are desirous of recording the terms and conditions of their agreement in writing
NOW THIS MEMORANDUM OF UNDERSTANDING WITNESSETH AS UNDER:-
1. ABC Group has caused to be incorporated a Company known as ________ Pvt. Ltd. hereinafter referred to as "the Company" and has, since several months been working on establishing an internet portal relating to___________________.
2. The paid up capital of the Company shall be Rs._________________ /- (Rupees________only) comprising __________(____________) equity shares of Rs._____ /- (Rupees_________) each.
3. It has been agreed that XYZ group shall hold ....... of the paid-up capital of the Company and that XYZ Group shall hold........ of the paid-up capital of the Company.
4. It is further agreed that......... shall be allotted by ABC Group as and by way of stock options at their discretion to employees, associates, content writers and Technology partners and other supporters on such terms as decided by the Group. It has however been agreed that...... out of this ........ shall be allotted to Mr. XYZ and........ to Mr. PQR leaving thereby........ to be allotted by ABC Group as described above.
5. XYZ has agreed that for the.........to be allotted to the XYZ Group, the XYZ Group shall pay to the Company a total amount of Rs. __________________/- (Rupees _________________Only) to comprise share capital and premium of the total amount of Rs.__________/- (Rupees ______________Only) an amount of approximately Rs._________/- (Rupees _____________Only) being the equivalent of U.S. $ ____________/- has already been received by the Company by way of Foreign Inward Remittance received from XYZ. These amounts already received have been treated by the Company as advances against share capital and premium. The balance amount of Rs____________/- (Rupees ______________ Lakh Only) approximately is to be paid in the following manner.
a. Rs.__________ /- (Rs______________ Only) by (date)
b. Rs.__________ /- (Rupees ___________Only) by --/--/---
c. Rs. __________/- (Rupees_________ __Only) by --/--/---.
d. Rs. _________/- (Rupees ___________Only) by --/--/---
e. Rs. _________/- (Rupees ___________Only) by --/--/---
f. Rs. _________/- (Rupees ___________ Only) by --/--/---
g. The balance to make up Rs_____________/- (Rupees ______ only) by (date)
6. It has been mutually agreed that the Company shall not further dilute its equity or avail of finance from any other person nor shall it agree to allot any shares to any other person without the consent of XYZ. It has been further agreed that ABC Group shall not sell all or any of the shares allotted to them without the consent of XYZ Group until such time as there is an IPO or a second round of financing by mutual agreement. In the event of a second round of financing becoming necessary, it shall be done by mutual Agreement between the parties hereto and it is expected that an Initial Public Offering (IPO) will also be made and that shares will be issued to the public. The parties have agreed that for any future rounds of financing as mutually decided there will be a proportionate dilution of shares.
7. XYZ shall have the right to be a Director of the Company and ABC shall cause XYZ to be appointed to the Board of Directors whenever XYZ desires.
8. ABC shall cause this Memorandum of Understanding to be taken on the records of the Company and the Company will also agree to abide by all the terms and conditions hereof.
9. The parties hereto record that this Memorandum of Understanding reflects the broad terms of their Agreement and they agree to execute and sign a detailed Shareholders Agreement and such further Agreements in writing as may be required from time to time to give effect to the development promotion and financing of the portal in the best possible way.
IN WITNESS WHEREOF the parties hereto have hereunto set and subscribed their respective hands the day and year first hereinabove written.
SIGNED AND DELIVERED by the Withinnamed
MR. ABC
In the presence of __________________
SIGNED AND DELIVERED by the Withinnamed
MR. XYZ
In the presence of________________________
There are no specific documents required for the drafting and execution of an MoU. However, ID proofs of the parties in order to confirm the names and permanent addresses of the parties shall be scrutinized. Moreover, papers evidencing the parties’ rights to carry out the business (as per the MoU) and provide the service(s) in question, could be scrutinized.
No set procedure is applicable in the making of an MoU. However, once the MoU has been drafted by a lawyer, it should be specifically and carefully read by both the parties to the MoU. Any necessary changes required to be made shall be carried out and once the MoU is finalised, it shall be signed by both the parties. Each party should thereafter keep a signed copy of the MoU.
A Memorandum of Understanding essentially embodies an understanding or a consensus between two parties regarding a particular project that they desire to undertake. However, if a document merely exists as an MoU, it does not exactly conclude that such document is or is not a (legally binding) contract. The intention of the parties can be understood from the contents of the MoU, and thus, the legal nature of an MoU depends upon the rights, duties and obligations that are created between the parties by way of this MoU.
Generally, no stamp duty is payable on MoU. However, according to law, if the MoU incorporates an agreement for purchasing of immovable property and if it is needed to be produced in court, stamp duty is needed to be paid upon it.
One of the first and the most important steps that you must undertake is to hire a good documentation lawyer as he/she is aware of the nitty gritty of the legal procedures and necessary requirements involved in drafting of MoUs. A lawyer would draft an MoU, better than you can yourself, for obvious reasons. A lawyer has the necessary legal knowledge and experience to handle and draft such documents. He/She will be able to guide you and draft for you according to your particular situation - the facts, circumstances, business risks and needs involved. A documentation lawyer is aware of good drafting technique and the clauses that must be included in your Memorandum of Understanding. Hiring a good lawyer in order to draft such important legal documents is a prerequisite and will help you in more ways than one.
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