Procuring office stationery, exit offer for an Angel and a large scale M&A – what do they all have in common?

Monday 13 January 2014 was described as ‘Mega Monday’following the announcement of $100bn worth of takeovers around the world in just one day. It’s a far cry from ‘Blue Monday’the most depressing day of the year just a week before.

So it’s true, good things happen after bad situations. But what happens now? What are the terms of the deal? Are there pre-sale conditions to satisfy? And if so, what are they?

Buying a business is not as simple as buying apples from a supermarket, so where do you start?

Answer: Heads of Terms

Don’t let the jargon put you off. Heads of terms are very useful.

Parties to an M&A deal including exits backed by a VCT or private equity often agree a set of terms ahead of signing the main agreement. Referred to as ‘heads of terms’they set out the key terms of the commercial transaction (e.g. price, liability and apportionment of risk) which will be incorporated into the main agreement. They are also known as letters of intent, memorandum of understanding, term sheets, or heads of agreement.

Heads of terms are not used exclusively for corporate deals. Businesses use them all the time and more often than not, they don’t realise they are doing so. Purchase order forms used to procure office stationery are a perfect example of heads of terms.

Purpose of Heads of Terms

Although heads of terms are drafted to be non-binding, they provide evidence of serious intent between the parties and have some moral force.

There is no standard for heads of terms. Heads of terms could be a simple one page letter drafted between the parties down the pub or a long form document drafted by the parties’professional advisers in a swanky office. Either way the main purpose of the heads is to agree, from the outset, the salient commercial points.

By agreeing the key terms, parties can avoid it avoids unwanted surprises later on and wasting time and money, especially once the parties have instructed lawyers, accountants and other advisers.

Health warnings

Although heads of terms are useful to draw out the parties intentions and confer a degree of moral commitment, parties should be aware of issues which can arise from their use.

Binding Terms

Although heads of terms are drafted to be non-binding, the parties agree that some practical terms may be legally binding terms. Such as:

  • each party to bare their own costs;
  • the parties to keep the discussions and the terms of the heads confidential;
  • exclusivity for a set period to negotiate and conclude the contract;
  • thegoverning law and jurisdiction which apply to the heads in the event of a dispute.

To ensure a particular clause is legally binding, spell it out and make it crystal clear.

Limited flexibility for subsequent negotiations

Parties often spend a significant amount of time negotiating the heads and may be difficult later on to request a fundamental. Therefore, it is important to engage with your professional advisers from the outset to flush-out and discuss the relevant technical issues such as tax issues to pension and employee transfer, and have them documented in the heads.

Practical advice: the three magic Words

In summary, heads of terms carry a moral force but are not intended to be legally binding, although some terms may be expressed to be legally binding . . . confused!?

To prevent a party from treating the heads of terms as a contract include at the top of each page, ‘Subject to Contract’. By inserting these short, but effective words, it should prevent a party from relying on terms contained in the heads of terms.

These three magic words should also be used in all correspondence, including emails, when terms are being negotiated.

So, before you enter into any significant contracts, make sure the heads of terms are structured well and the key terms are agreed in principle. Remember the heads form the basis for negotiation between the parties in anticipation of entering into a contract.

For further information or assistance in negotiating and/or drafting heads of terms, commercial contracts, M&A, and general corporate advice, please contact either Guy Vincent(GuyVINCENT@bdb-law.co.uk) (Partner) or Youichi Iisaka (YouichiIISAKA@bdb-law.co.uk) (Solicitor) atBircham Dyson Bell LLP on 020 7227 7000.


By UKBAA 31 Jan 2014