The Heads of Terms sets out the main points the parties have agreed. Heads of Terms can take many forms from non-binding simple letters of intent and memoranda of understanding to term sheets where the aim is to highlight the agreed terms and there is no urgency in completing the transaction. The Heads of Terms should be non-binding and should be marked as Âsubject to contractÂ. The parties may want to negotiate under an exclusive period, this should be set out in the Heads of Terms and should be binding on all the parties. The seller should also obtain from the buyer a signed confidentiality agreement and there should be provisions in the Heads of Terms setting out a commitment that the parties only use the confidential information for the proposed purpose.
In situations where parties begin to incur costs before the terms have been agreed, the Heads of Terms can become binding and carry much greater weight. As a result there is no standard Heads of Terms and they can vary considerably, with parties agreeing a succession of Heads of Terms throughout the commercial transaction to simple letters.
Hence, there are several advantages to using Heads of Terms:
- increases confidence between the parties by creating a moral obligation on both parties to abide by the terms of the agreement
- the Heads of Terms can clarify any misunderstandings and highlight any major issues by clearing any major obstacles before time and money is spent
- opportunity to introduce binding terms such as confidentiality and protection for the parties in failed transactions and
- Heads of Terms can summarise the main terms of the deal, informing outside advisors, and investors efficiently, whilst also providing the necessary information to any regulatory authorities.
However there can be some disadvantages of using heads of terms:
- Heads of Terms can become a legally binding agreement when it was not the intention of the parties
- as Heads of Terms carry a strong moral obligation, it could also reduce the flexibility of the parties to negotiate the final agreement
- competition law may apply to the Heads of Terms once agreed and fall foul of international law, such as a duty to act in good faith, giving rise to a potential action by an injured third party and
- a disproportionate amount of time may be taken to agree the Heads of Terms, resulting in the parties negotiating the main agreement twice.
The Heads of Terms generally include:
- Purchase Price
- Payment Details
- How to Pay
- When to Pay
- Share or Asset Sale
- What is being sold
- Employee Issues
- Pension Fund
- Intellectual Property Rights and Goodwill
- Confidential Information
- Timetable to Complete
This is a non-exhaustive list of matters which need to be covered, the more points agreed at the outset between the parties the less likely there will be disagreements further down the line. On the flipside Heads of Terms can be a useful tool in highlighting the main terms of a commercial transaction, but need not be overly used in simple transactions.