The biggest problem with verbal agreements (also know as oral agreements) is proving them. If one person says that an oral agreement was reached and the other party denies the agreement, it may be difficult to enforce the agreement.
From an auditor’s perspective, verbal agreements may be problematic because they do not generate a paper trail. I do not see problems with verbal agreements if they are later followed up by written agreements.
When I analyze a stock, oral agreements are a minor red flag. It may be a sign of sloppy work or stupidity. It could be more. One way to identify potential shorts is to look for these agreements (e.g. by using Edgar’s full text search). However, that is not how I find shorts.
Here are some publicly-traded companies with oral/verbal agreements/arrangements.
GPRO (11.20.14 424B4):
During our development stage, Nicholas Woodman, our CEO, entered into a verbal agreement with Neil Dana, an employee since October 2004, pursuant to which Mr. Woodman agreed to share 10% of any proceeds he received from the sale of our equity securities held by Mr. Woodman. Pursuant to Mr. Woodman’s agreement with Mr. Dana, in March 2011, we paid Mr. Dana a cash payment of $6.1 million, and Mr. Woodman reimbursed us in the amount of $6.1 million.
SFUN (04.30.14 20-F):
During 2011, the Beijing Municipal State Tax Bureau clarified the tax policy with SAT in relation to the “three-year exemption, three-year 50% reduction” tax holiday that was implemented for entities which qualified for the HNTE status in the Zhongguancun Science Park (“ZSP”) and reached a verbal agreement with SAT that Circular 157 is not applicable to the entities registered in the ZSP.
MHGC (04.03.14 PRE 14A):
An entity controlled by Messrs. Burkle and Sasson hold equity interests in the ownership of a pool lounge and club, Daylight Beach Club, which opened at the Mandalay Bay Hotel & Casino in Las Vegas, Nevada in May 2013. Pursuant to a verbal agreement we entered into with the owner, we operate and manage the pool lounge and club and earned approximately $307,000 in management fees in 2013 for these services.
CREG (11.14.14 10-Q):
Notwithstanding the requirement, there is a verbal agreement from the HYREF Fund that for the purpose of the efficient utilization of working capital, Zhonghong does not have to maintain a minimum funding level in its designated account with the Supervising Bank.
N (04.30.14 DEFR14A):
Netsuite (N) bought a company from Oracle, whose CEO is Lawrence Ellison. Through their purchase they inherited a verbal agreement.
Commencing in 2004, the Company entered into a verbal agreement with Oracle Racing, Inc. (“Oracle Racing”), a sailboat racing syndicate. Lawrence J. Ellison, who beneficially owns a significant portion of the Company’s stock, is the primary source of funding for Oracle Racing. Under the terms of the agreement, the Company agreed to supply certain of its cloud-based application services to Oracle Racing in exchange for logo placement on the sailboats.
To be fair, I don’t think that there is anything wrong with this arrangement. Some verbal agreements are mostly harmless.
MY and REXX are companies written up on this blog.
ATOS (11.12.13 10-Q):
On May 26, 2009, the Company borrowed $5,000 from its Chairman of the Board and Chief Executive Officer as a short-term, unsecured loan via verbal agreement and did not bear any interest. Commencing June 30, 2010, the loan was converted into a written Promissory Note bearing an annual interest rate of 10%, with a maturity date of December 31, 2010. This note was repaid in full on May 16, 2011 including approximately $439 of accrued interest.
CHOP (04.30.14 20-F):
Since January 2010, we have paid Mr. Harry Edelson, a director, a monthly fee of $10,000 in return for his verbal agreement to perform certain investor relations services. These services have included or may include the following: (a) helping to promote awareness of the Company within the investment community through introductions to investors, investment banks, and research analysts; (b) participation in future deal or non-deal road shows and financing activities of the Company upon request and at the discretion of the Company and the Board of Directors; (c) assistance in investor conference presentations, whether or not management of the Company is able to be present; (d) providing occasional office use and communication facilities where required by the Company; (e) monitoring and providing capital market feedback on the Company; and (f) such other activities as may be requested of him, from time to time, by the Board or executive management team of the Company.
CANN (07.24.14 S-1/A):
During the two years ended December 31, 2013 and 2012 we paid Running Foxes Petroleum $-0- and $6,024 respectively, for office rent under a verbal arrangement.
TENG (05.23.14 10-K):
We lease this space from an unaffiliated third party under a verbal arrangement for $1,800 per month, inclusive of utilities.
KONE (01.15.15 20-F):
As of September 30, 2014, we had an outstanding loan of approximately $0.2 million to Xi’an Tech Team Investment Holdings (Group) Co., Ltd. The largest amount of the outstanding loan was $0.2 million during the past loan period. This loan was an unsecured verbal agreement and bearing no interest, which provided one-year term starting from January 1, 2014
NGS (04.22.14 DEF 14A):
We employed Mr. Taylor in January 2005 and the terms of his employment were governed by a verbal arrangement until August 2005 when we negotiated and entered into a written employment agreement with him which expired on January 13, 2008.
GEIG (09.23.13 10-Q):
On February 14, 2011, the Company had a verbal arrangement with Matt Reams, an officer, director and shareholder of the Company, for a total of $430. During the year ended October 31, 2012, the Company received an additional loan from Matt Reams for $555. The unsecured loan is due upon demand and bears interest at 8% per annum. As of July 31, 2013 and October 31, 2012, the principal amount of the loan is $985 and $985, respectively.
LBSV (03.01.13 S-1/A):
John Barrington currently serves as a consultant of the Company. Pursuant to a verbal arrangement with the Company, in consideration of his services as a consultant to the Company, Mr. Barrington is paid $10,000 per month; there is no written agreement relating to the foregoing arrangement.
ECAU (03.29.12 10-K):
We conduct our business through agreements with consultants and arms-length third parties. Currently, we have no formal consulting agreements in place. We have a verbal arrangement with the consulting geologist currently conducting the exploratory work on the Kaikoura Property. We pay to this geologist the usual and customary rates received by geologists performing similar consulting services.
VAPI (07.08.11 424B3):
In March 2010, we paid $1,000 to a company related to our chief executive officer for rent.We also have a verbal arrangement with PeopleString Corporation where we market our games to users of PeopleString. Mr. Adam M. Kotkin is also the Chief Operating Officer of PeopleString. The agreement was a mutual understanding where we would be allowed to beta test our game, My Mad Millions, with the users of PeopleString.
RBTK (02.12.15 S-1A):
Our principal office is located at Zhen Ding Resources Inc., Suite 205, 353 St. Nicolas, Montreal, Quebec H2Y 2P1. The offices in Montreal are not under written lease but are rented through averbal agreement , on a month to month basis, from 150206 Canada Inc. at $500 per month, due and payable at each calendar quarter end. The occupancy began October 1, 2013.
OEDV (09.24.14 10-K/A):
In 2011, Mr. Bradford received a cash bonus of $100,000 and an increase in base salary to $300,000 pursuant to a verbal agreement .
YOSN (08.14.14 10-Q):
Advance from stock subscription represents funds received from a potential equity investor. This advance is personally secured by a number of Company shares held by the Company’s CEO.Currently, there is no agreement in writing and this advance is treated as a loan on the accompanying consolidated balance sheets. Per a verbal agreement , if the Company becomes profitable in the current year, the investor will convert this loan to equity and the Company will issue shares to him.
CANF (04.24.14 424B3):
We are headquartered in Petah-Tikva, Israel. We lease one floor in one facility pursuant to a lease agreement with Eshkolit Nihul Nadlan LTD, an Israeli limited company, that pursuant to a verbal agreement expires on December 31, 2014. The Petah-Tikva headquarters consists of approximately 300 square meters of space with eight parking spaces. Lease payments are approximately NIS 23,853, or $6,000, per month. If our lease is terminated, we do not foresee significant difficulty in leasing another suitable facility. The current facility houses both our administrative, clinical and research operations. The research laboratory consists of approximately 150 square meters and includes a tissue culture laboratory and a molecular biology laboratory.
GRMC (04.15.14 10-K/A):
The owners of Gold Dust Mines, Inc. continued to do the annual assessment work on the remaining claims on our behalf through 2002 on the basis of a verbal agreement between our former management and Gold Dust Mines, Inc. to extend its mining lease.
UWN (07.29.14 10-K):
In 2008, we sold our 40% interest in BVD to B. V. Oro, LLC (“BVO”), which is owned by our former partner and related parties, for $16 million in cash and a $4 million receivable from BVD due upon the developer receiving repayment of the loan advanced to the tribe, which loan is currently due. The developer has reached a verbal agreement with the tribe to extend the loan until receipt of permanent financing for the project. Should the proceeds of this permanent financing be insufficient to pay off the receivable, the remainder is due from BVO no later than two years after the opening of a gaming/entertainment facility to be built by BVD for the tribe. This receivable bears interest at the rate of prime plus 1% and is guaranteed by our former partner and related parties. In addition, we are entitled to a 5% carried interest in the membership interest sold to BVO.
*Disclosure: No positions in any of these companies.