Many businesses go into commercial transactions with goals and requirements but these are sometimes only enshrined once a final deal is struck – leaving things exposed to ambiguity.
Here Matthew Johnson, an Associate Solicitor and Commercial Law expert with Palmers, explains why a robust heads of terms agreement can offer greater certainty for all parties concerned.
In the early stages of negotiation, you should consider creating letters of intent, commonly known as heads of term agreements.
These documents outline the terms of a commercial transaction, commonly when buying or selling a business that has been agreed in principle between parties in the course of negotiations.
Why are heads of terms useful?
They act as a point of reference and a reminder during discussions. The heads of terms show ‘moral commitment’ but are not legally binding and cannot force the parties to conclude the deal on those terms.
They often simply act as confirmation of what parties ‘shake hands’ on. Care must be taken when setting out heads of terms, as any ambiguity can create doubts over whether each party intended the agreement to be legally bound by all or some of its terms.
However, more importantly, they will often include what is known as “exclusivity”. This is critical for a buyer as it gives them confidence that a seller is not negotiating with another party, while for sellers it allows them to set certain conditions for an exclusive deal.
If they aren’t legally binding, what is the point?
Although they may not be legally binding, any agreement can create a strong moral commitment that may lead to difficulties if one party later tries to renegotiate.
Heads of terms can be a great way of considering the value of a deal and whether it can be achieved.
Can your negotiated point be written in a simple agreed document? If not, how can you expect to complete a final deal?
Where heads of terms can be reached, it can demonstrate confidence in a transaction, which can help win the support of third parties, such as lenders and shareholders.
Given the potential pitfalls and benefits of heads of terms, you must engage with a corporate solicitor early on in the process.
What are the dangers of heads of terms?
Businesses have previously been caught out by not clearly stating that the terms are not intended to be binding or which parts are legally binding.
Parties need to carefully consider any action that implements an agreed point in heads of terms agreements, as doing so might suggest that they intend to be bound by them later.
Having an experienced corporate lawyer by your side during the creation of heads of terms can minimise these risks and create an agreement that helps to frame a final deal.
For more information or advice on creating a heads of terms agreement or to discuss any aspect of commercial law, please get in touch with us.