Heads of Terms: Do I Need Them?
Both parties in any commercial transaction should consider the need for Heads of Terms.
The Heads of Terms document will summarise the basic points of principle that have been agreed between the parties. They should not go into detail – this will be contained in the full Sale and Purchase Agreement.
Heads of Terms: Points to cover:-
The points to cover will depend on the circumstances of each transaction but can include (though not limited to) the following;
- Parties to the transaction.
- The Assets or Shares for sale, and a brief description of the transaction.
- Price structure and conditions.
- Any deferred consideration.
- Any non-cash consideration.
- Any security requirements.
- An approximate timescale for implementation.
- Confidentiality provisions.
- Exclusivity provisions.
- Costs – e.g. who will pay each party’s legal fees?
- Restrictions and non-solicitation provisions.
- Applicable Law and Choice of Jurisdiction.
Whilst Heads of Terms are normally expressed to be non-binding, certain clauses may be of immediate binding effect. For example, terms on Costs, Confidentiality and Exclusivity (amongst others). Care should be taken when drafting to provide for clarity here. For example, where terms are not intended to be legally binding, the use of ‘subject to contract’ should be used.
If certain terms are to be legally binding, the Heads of Terms should either be executed as a deed, or consideration will need to be paid (at least a nominal amount i.e. £1).
You should seek advice if you are not fully aware of the various legal implications which may be created when signing Heads of Terms.
Heads of Terms: Advantages and Disadvantages
Perhaps the biggest advantage lies in structuring the deal and providing a frame work for legal representatives to follow. However, this in itself could be a disadvantage, i.e. perhaps having less flexibility to progress the transaction.
Heads of Terms may have particular advantages and disadvantages depending on the individual circumstances of the proposed transaction and so you should seek advice if you are unsure of the implications of signing Heads of Terms.
Please see our snapshot on Confidentiality Agreements for more information.