Parties using Heads of Agreements, term sheets or similar documents in mergers and acquisitions need to take care to ensure that the document adequately reflects their intentions. Failure to do so could lead to unexpected risks and outcomes.
Heads of Agreement (HAs) in mergers and acquisitions are usually relatively concise preliminary documents that set out key matters between parties and guide the long-form documents, such as Share/Business Sale Agreements and Shareholders Agreements. They are commonly used in the acquisitions of, and investments in, businesses for various reasons, including:
However, care needs to be taken not to duplicate efforts and costs (especially for an unenforceable document, see below) if the transaction can be quickly and simply documented in the final agreements.
In addition, from a strategic perspective, a party may not wish to accelerate the early negotiation of difficult points before trust has been built and the parties are “invested” in the transaction.
Further, there are legal and tax risks to the parties, including if they expect the HA to be binding and it’s not (or vice versa).
Binding vs. non-binding HAs
A party may want an enforceable or “binding” HA to (among other things):
A non-binding HA:
The parties should express in the HA whether it is intended to be legally binding or not. However, this in itself will not determine whether it is enforceable.
To be enforceable:
Also, if the HA is executed as a formal agreement or deed, care should be taken to ensure due signing, exchange and delivery.
Typical terms of HAs include details of:
Commonly, parties agree in HAs that they will carry out further negotiations in “good faith”. If such provisions are too vague or uncertain, such commitment may be unenforceable. To assist with enforceability, good faith clauses may benefit from further details. For example, a specific period during which the parties must negotiate in good faith and an obligation to refer disputes to senior executives for resolution may assist.
Often, the outcome is for some (but not all) clauses of the HA to be expressed to be legally binding. For example, the clauses regarding exclusivity, confidentiality and costs are typically binding.
The final, long-form documents should clarify any continuing obligations in the HAs and/or contain an ‘entire agreement’ clause so that they supersede the HA.
Care needs to be taken to ensure transaction documents adequately record and reflect the parties’ intentions. HAs that are prepared with consideration to the above matters can ensure transaction certainty, risk mitigation and a strong relationship between the parties.
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.