Required approvals: Overview, definition, and example
What are required approvals?
Required approvals refer to the necessary authorizations, consents, or permissions that must be obtained before certain actions can be taken under a contract. These approvals may come from regulatory agencies, shareholders, lenders, or other parties involved in the agreement.
For example, if a company plans to merge with another business, it may need approval from its board of directors and regulatory authorities before proceeding with the transaction.
Why are required approvals important?
Required approvals are important because they ensure compliance with legal, regulatory, and contractual obligations. They prevent unauthorized actions that could lead to legal disputes, financial penalties, or contract breaches.
For businesses, specifying required approvals in a contract helps define the decision-making process and ensures that all necessary parties are involved before significant actions are taken. This is especially critical in mergers, acquisitions, financing arrangements, and corporate governance.
Understanding required approvals through an example
A technology company wants to issue new shares to raise capital. The company’s bylaws state that any issuance of shares requires approval from at least 75% of its shareholders. Without this approval, the company cannot proceed with the stock issuance.
In another case, a real estate developer signs a contract to build a commercial complex. However, the project cannot move forward until the developer obtains zoning approvals and building permits from local authorities. These required approvals ensure the project complies with legal and safety regulations.
Example of a required approvals clause
Here’s how a required approvals clause might appear in a contract:
“The Parties acknowledge that the performance of certain obligations under this Agreement is subject to obtaining required approvals from regulatory authorities, lenders, and other necessary third parties. No action requiring such approval shall be taken until the requisite consents have been obtained in writing.”
Conclusion
Required approvals ensure that certain actions cannot proceed without proper authorization, protecting parties from legal and regulatory risks. Clearly defining these approvals in contracts helps prevent unauthorized decisions and ensures that all necessary permissions are secured before significant business or financial transactions take place. A well-drafted required approvals clause provides clarity and legal certainty in complex agreements.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.