What are Heads of Terms?
Heads of terms (HoT) are used to set out the key terms to be agreed between the parties before substantial work is undertaken on a transaction.
They are generally specified to be non-legally binding with the exception of certain provisions as discussed further below.
Why are they used?
HoT are used to ensure the parties are on the same page prior to incurring the time and expense of substantial due diligence, drafting and negotiation.
They establish key points of contention at an early stage and show that the parties are committed to negotiating the transaction, at least to an extent. A buyer might feel more comfortable sharing information when they have seen a level of commitment from the seller.
Problems with Heads of Terms
As they are generally not legally binding it is possible for a party to change their mind after the HoT are agreed and wish to re-open negotiations on a previously agreed point. On the other side of the table, should you wish to renegotiate a point agreed in the HoT this could be more difficult.
With small transactions it might be too much to negotiate an entirely separate document first when an email setting out the key terms might be more appropriate.
HoT are intended to set out the key points and will not cover the detail. This means that they do not eliminate the need for negotiation over the precise wording later down the line.
It is possible, if you are not careful, that they can become unintentionally legally-binding. Signing heads of terms could also have implications for public companies in the case of disclosure requirements and may also have tax implications. It is important to take advice before committing to anything.
Key points in Heads of Terms
The key provisions will depend on the particular circumstances of the transaction itself, but there are certain terms that you would often expect to see, such as:
- The offer – the price to be paid, how this will be paid and what it is that is being purchased.
- Assumptions – assumptions the seller has made in coming to the price. This might include financial assumptions or the need to carry out certain restructuring work prior to completion.
- Conditions – conditions to the offer. For example that the due diligence is satisfactory and that more recent management accounts are produced by the company.
- Due diligence – what the seller expects to review as part of due diligence and the way in which this is expected to be carried out.
- The key terms of main agreements – including restrictive covenants, warranties, and limitations of liability.
- Timetable – any key dates such as the anticipated timetable to complete due diligence and completion itself.
- Exclusivity – the buyer particularly may wish to agree a period of time in which the seller promises not to negotiate with anyone else. This is intended to prevent the buyer wasting time and expense in negotiations to find the seller has also been negotiating with other potential buyers and if typically expressed to be legally binding.
- Confidentiality – provisions can be included here to cover the sharing of information, however a separate non-disclosure agreement may be more appropriate depending on the circumstances. A confidentiality provision would need to be expressed as legally binding.
- Governing law – considering that most, or all, of the provisions of the HoT might be expressed as not legally binding, this could seem unnecessary. However, in order to ensure you understand how binding provisions might be inadvertently created, it is important to agree the jurisdiction under which the HoT would be interpreted.
Speak with our expert Joe Lewis or our Commercial team here.
This article is part of our share sale series. Read our previous article in our series here.