B P Collins’ corporate and commercial team explores heads of terms and what to consider including in your heads of terms for your next deal or project.
What are heads of terms?
‘Heads of terms’ is the name given to a document that is typically entered into at an early stage of a transaction or project. Depending on the industry, region or context, you may come across different names for heads of terms such as a letter of intent (LOI), term sheet, memorandum of understanding, or agreement in principle.
The key point is that these types of documents are preliminary agreements that are entered into between parties before they enter into a final, more detailed contract for the relevant transaction or project. The purpose for these documents is usually to outline:
- the main terms that are usually already agreed between the parties; and
- a direction of travel for how the parties will work moving forwards, up to the final agreement.
What do heads of terms typically include?
There isn’t a one-size-fits-all heads of terms document. However, these documents typically include:
- Certain binding terms:
– Sometimes parties include a binding exclusivity period – in particular a buyer in an M&A deal may want an exclusivity period as it will be incurring significant costs to explore a deal and it doesn’t want to find itself in a position where the target business has been purchased by someone else in the meantime.
– Confidentiality obligations to ensure that information the buyer is giving about their business remains confidential – although some parties prefer to include short confidentiality provisions in the heads of terms and enter into a more detailed standalone non-disclosure agreement (an NDA).
– Governing law and jurisdiction – these are helpful to include so that if there are disputes over the heads of terms, it is clear what law governs the document and where such disputes are to be heard. - Non-binding understandings between the parties:
– Often the main commercial terms, such as price, how this will be paid, and completion date will be non-binding – although there can be advantages and disadvantages with this so parties will need to consider what they wish to record. (please see below). - The next steps that each party will take with the aim being to enter into a final contract for the relevant transaction or project, for example:
– Setting out the proposed process for the due diligence phase of the transaction.
– Depending on the transaction, the heads of terms can flag what clearances and approvals might need to be obtained from third party regulators.
Should I include non-binding terms?
Each deal is going to be different and so it is important to consider what you are looking for.
Including some non-binding terms can be helpful to ensure the parties are on the same page – at least in principle:
- If parties have put the key principles in writing, it demonstrates progress in negotiations. This can give them confidence to move forward with the next steps in the transaction or project, allowing the finer details to be finalised at a later stage.
- If the parties don’t agree on some of the principles, this is also helpful to understand so they know what to prioritise in their negotiations. The parties can understand each other’s ‘red-lines’ at an early stage and avoid wasting time and costs if they cannot agree on fundamental issues.
Even if your heads of terms include some non-binding terms, these may have moral force. This can be an advantage if you include something you want as it can be harder for the other side to justify going against what was agreed in the heads of terms.
However, the advantages of non-binding terms can have the reverse effect for you if the other party includes something you don’t want. Even if a term is non-binding, it can limit your room to manoeuvre in negotiations. Therefore, you should consider the level of detail you want to include in the heads of terms in case there is something that you want to save for discussion later down the line.
If you’d like to discuss the issues raised in this article or any other corporate or commercial matter, please contact B P Collins’ corporate and commercial team at enquiries@bpcollins.co.uk or call 01753 889995.
