Electronic signing in finance transactions

Correct as of 9am, 22nd September. This article is being maintained.

1.Why use an electronic signature?

2.What is e-signing?

3.Is e-signing valid?

4.What types of document can be signed electronically?

5. Are there any restrictions/protocols relating to electronic signatures?

6. What is the position with overseas entities?

7. E-signing with a secure platform

8. E-signing without a secure platform

1. Why use an electronic signature?

With the implementation of home working and social distancing measures to address the spread of COVID-19, the logistics of signing documents and closing deals have become more complicated.

Traditional signing methods are often unworkable. Physical signing meetings are not possible, and in many cases “Mercury compliant” virtual signings (where the signatory prints, signs, scans and emails signature pages and documents to the co-ordinating lawyers, following Law Society guidelines) are also often not possible due to restrictions on and difficulties with printing facilities.

Electronic signing (“e-signing”), where an electronic version of the document is signed using an electronic signature, is becoming more common. E-signing is convenient and quick but counterparties in financing transactions may want to consider the level of security and verification which may be required for their finance documents.

1. What is e-signing?

E-signing can take a number of different forms: a signatory ‘copying and pasting’ an electronic image of his or her signature, adding their name with a stylus or finger, or simply typing their name into a document. Another valid method where printing facilities are not available (other than for deeds) is to write out the execution page in manuscript, then sign and email a scanned copy or photograph of the handwritten and signed execution page. Finally, a number of web based platforms (such as DocuSign) allow for execution versions of documents to be shared electronically for digital e-signatures to be added by the counterparties.

The advantage of electronic signing platforms is the additional security, authenticity checks and confidentiality they may provide.

The level of consideration and verification which may be required when accepting electronic signatures in a finance transaction will depend on the circumstances of the transaction, the context of the document and the signing party. A lender will not be concerned about its own signing process, and borrowers are likely to be more relaxed about their lender’s signing methods. However, lenders are likely to be more cautious regarding their obligors’ signing processes, authorities and checks.

1. Is e-signing valid?

Yes, the Law Commission has confirmed that electronic signatures are valid and can be used to execute documents, including deeds, provided any relevant requirements are observed.

1. What types of document can be signed electronically?

For financing transactions, generally all documents governed by English law can be signed electronically until recently the Land Registry required that copies of “wet ink” original documents be certified and submitted for registration. However, in response to the difficulties presented by COVID-19, the Land Registry now accepts documents which have been signed electronically via an e-signing platform such as (but not limited to) DocuSign provided its requirements are satisfied, which include a requirement that all the parties have conveyancers acting for them (and a conveyancer must control the signing process) and two factor authentication for the signatories – in the case of DocuSign, a unique access code must be sent by text message by the DocuSign platform.

Where overseas entities and/or governing laws are involved in a transaction (including Scotland), local lawyers will need to be consulted - please see section 6 below.

Where finance documents such as facility agreements can be signed as simple contracts they can be signed by a signatory electronically in the same way as with physical signing.

Other finance documents, such as security documents and guarantees which are signed by obligors as deeds, can also be signed by electronic signature provided the required formalities are met. A company can execute a deed in three ways (otherwise than by using a power of attorney, which would itself have to be a deed, or its seal): (i) two directors can sign, (ii) a director and the company secretary can sign, or (iii) a director can sign in the presence of a witness, who must also sign.

We recommend options (i) and (ii) to avoid the need for a witness as it is often difficult to confirm or verify that a witness was physically present when a document is electronically signed. The witness must be physically present with the signatory and see the signatory signing. Watching the signing by video link or screen-sharing is not considered sufficient. The witness must not be a party to the document, but otherwise is not required by law to be independent, however, as he or she may be required to give evidence as to proper execution by the signatory it is advisable that an independent witness be required for the signing of any finance documents by obligors.

Utilisation requests, notices and acknowledgements, corporate authority documents and other ancillary documents can all be electronically signed.

The signatories may sign on the same electronic copy (which can be accessed via different devices), or in electronic counterpart.

It is possible for one party to sign by e-signature while the other party signs using a “wet-ink” signature or for parties to sign by different e-signature methods or platforms, as long as each party uses a valid execution method.

1. Are there any other restrictions/protocols relating to electronic signatures?

Before agreeing an electronic signing process, the lawyers should check and confirm there are no restrictions on e-signing in the signing company’s articles (or other constitutional documents), and a client should check there are no restrictions in its own internal policies (for example risk management policies). Where overseas entities and/or jurisdictions are involved in the transaction, the co-ordinating lawyers will need to consult local lawyers in each jurisdiction as to any local restrictions – please see paragraph 6 below.

Where electronic signing is proposed by a counterparty, their lawyers should give early notice to the other parties’ lawyers on the transaction to allow for the e-signing method to be considered and agreed in advance. In particular, finance parties may need to confirm whether they have any internal processes or policies which require wet ink physically signed documents (for example for utilisation requests).

The details of the signing processes should be discussed and agreed as early as possible ahead of completion. Signing/ release instructions should be agreed and circulated by the co-ordinating lawyers following the protocols for Mercury virtual completions.

1. What is the position with overseas entities or overseas documents?

Where a transaction involves (a) overseas entities and/or (b) documents subject to governing laws outside of England and Wales, the local lawyers should always be consulted to confirm that (1) in the case of (a) the entity has authority to sign using e-signing, and at all times (ii) that the local law recognises and permits the use of e-signatures, (iii) that the courts in that jurisdiction recognise documents signed electronically, and (iv) whether there are any jurisdiction specific signing formalities such as notarisation or legalisation.

Under Scots law, whilst electronic signatures are valid for most documents, there are significant differences and Scots law advice should always be taken where there are Scottish entities or Scots law documents.

1. E-signing with a secure platform

There are a number of e-signing platforms available. One of the main advantages of using an e-signing platform is that it is likely to have extra layers of security around the identities of the signatories. Before accepting e-signatures from counterparties using an e-signing platform the recipient should check the appropriate protocols and steps have been followed.

CMS has been working with the DocuSign platform since May 2017 for certain clients and transactions, but more widely since March this year, and for matters including for financing transactions for lender and borrower clients. As CMS has been working with DocuSign most frequently, the practical steps outlined below demonstrate how we use the specific functionalities of the DocuSign software in practice to provide additional assurance.

Alternative encrypted platforms are available for use (for example Adobe offers similar software) and the IT and security protections of those should be considered before use, together with the functionalities available in practice as regards the authenticity and verification of the signatories.

By way of illustration and summary as to the approach taken by CMS, the practicalities of using DocuSign are as follows:

• Your co-ordinating lawyer will organise for the execution versions of documents to be uploaded to the DocuSign platform together with instructions as to how to access the document, using an email address.
• Your co-ordinating lawyer will organise for a unique access code to be generated by DocuSign. This can be sent to the signatory directly from DocuSign (as required by the Land Registry) or by way of a separate email or over the telephone to ensure the signed access is restricted to the intended signatory.
• DocuSign automatically provides an audit trail of the transaction for evidential purposes. A certificate of completion is generated for each transaction which records the history of the document including which email address it was sent to, who accessed it, when and where signatures were added and the IP address of the device used for ‘signing’.
• The dated original document and certificate of completion will be retained by the law firms acting on the transaction together with the other transaction documents.

1. E-signing without a secure platform

We recommend using encrypted platforms due to the security restrictions, authenticity and verification/audit trail mentioned above.

Where a party proposes to sign electronically outside of a secure platform, whilst such e-signatures are capable in law of being used to execute the finance documents, it may not be possible to verify with the same level of comfort that the correct signatory signed the documents. Whilst fraud can never be discounted (even for a physical signing), there are likely to be no obvious reasons to doubt the authentic of signatures, particularly where reputable law firms are co-ordinating the signing. However, further checks and confirmations may depending on the circumstances be considered appropriate before such signatures are accepted, such as:

• an e-mail from the signatory confirming he/she inserted his/her signature into the relevant document and intends to be bound by it; and
• a board resolution from the signing party authorising the signatory to sign the documents by e-signature, in the manner in which they intend to e‑sign, confirming the board is aware of the process, and attaching a copy of the e-signature.

An article of e-signing in financing transactions under Scottish law is considered separately here.