Heads of Terms
- What are Heads of Terms? They are a summary list of everything agreed to be included in a deal between one or more parties.
- Are heads of terms important? Yes, they clarify the situation, tie people into the transaction and prove intent from the signatories.
- Should heads of terms be professionally drafted? Yes. It’s important to make sure you are not signing up to anything detrimental and the terms make sense.
- Are heads of terms legally binding? Usually they are not legally binding but they do morally commit those who sign them to the deal.
What are Heads of Terms?
Heads of Terms are a way to set out an agreed brief summary of the terms of a commercial transaction. They act as a map that can be used as a catalyst for further negotiations between parties and eventually to the formation of a formal legal contract. The Head of Terms itself are generally not legally binding (‘subject to contract’ is used to ensure this is the case) but are there to record the intention from both sides to take the transaction forward.
Why are Heads of Terms Useful?
Head of Terms are a useful tool in business negotiations, as they provide a launch pad to move a business deal forwards by removing the risk of the parties involved having a different understanding of the main points of the deal. It is generally a good idea to try and avoid complication or complex language at this stage as that can add an unnecessary amount of further potential confusion to the negotiations.
A Heads of Terms Agreement is also known as a Memorandum of Understanding (or MOU). It’s particularly useful document in complex agreements such as Acquisitions, Mergers, Joint Ventures, Shareholders Agreements, Commercial Property Purchases and other major Business transactions.
The crucial terms of a transaction need to be established at an early stage to set a timetable for smooth delivery of the final agreement. The points needing recording should include price, details of what is being bought or sold, planned timescales for delivery and the conditions to be satisfied for the transaction to proceed. To an extent the Heads of Terms, once agreed, locks in everyone to the terms and so making it difficult for major renegotiation further along the timeline.
A Heads of Terms document can also act as a bellwether indicating how serious all parties are to taking the transaction forward. If one side avoids negotiating and will not sign up to the Heads of Terms document then you should beware. It is likely to be a signal that they are not committed to the deal and to avoid more wasted time and legal fees you should consider refusing further negotiations until the Heads of Terms has been signed.
How to Construct a Heads of Terms Agreement
Initially consider what the key objectives are. What is the deal looking to achieve?
Remember to state the main points but don’t go into reams of detail. If you are not sure about the implications of something the other side are asking to remove or add, take professional advice. Even if the agreement is not legally binding it can still commit you to something. List the conditions to exchange and completion of the contract so you can identify when you have reached the point to complete the deal.
Timetable key events, this stops the negotiations going off track. Make sure everyone knows who is supposed to be doing what. If there are potentially complex or confusing parts to the deal, use the Heads of Terms to clarify them. What is supposed to be legally binding? What is not? Make sure everyone in on the same page on this. Finally, avoid a document drift, in that the Heads of Terms becomes a quasi-full version of the main contract.
Contents of your Heads of Terms Agreement
- Key assumptions on which material issues (such as price) were agreed.
- Conditions to exchange of contracts.
- Financial information (audited and/or management accounts).
- Regulatory approvals or tax clearances required.
- Board approval – how and when?
- Buyer’s financing. How is this being funded?
- Due diligence required. What will be needed in terms of access and documents.
- Third party consents/agreements.
- Material contracts terminated or adversely changed.
- Requirements for new contracts signed by key employees.
- Existing or required restrictive covenants.
- Loan facilities and documentation.
- Required final documentation.
- Any other material issues any party may want recorded.
- Procedures and timetable.
- Who is doing what?
- Exclusivity and NDA agreements needed.
- Allocation of costs in the event of the deal not proceeding.
- Jurisdiction under which the agreement is to governed.
Getting experienced legal professionals involved with the Heads of Terms process will, at the end of the day, save you time and money. It lowers the risk of including (or excluding) something crucial that could cause problems further down the line or even after the final contract has been signed.
Need Assistance or Legal Advice?
rhw solicitors have a commercial law team with a vast amount of experience and know-how and we are able to advise and assist in all aspects of contractual agreements including the creation of new contracts and amendment of current agreements.