This article titled “M&A Term Sheet: Importance and Legality” has been written by Mridul Sinha, Dharmashastra National Law University Jabalpur
Introduction
A M&A Term Sheet is basically a document that lays out the requisite terms and conditions that the parties agree on at the initial stage of a deal. It’s like a summary putting out the fundamental aspects the parties have decided along with some additional details. It is also regarded as a letter of intent, memorandum of understanding, etc. Although these documents might have a varied style, their function is outlining the main terms and conditions that the parties have decided upon during the early phase of the deal.[1]
Use of Term Sheet in M&A Transaction
A M&A Term Sheet being a useful tool in a M&A transaction allows the parties to identify the deal breakers very early in that process. It is helpful in the terms because if the parties know there’s an issue which cannot be resolved, they may choose to step back and can abort the transaction early on. If there’s a problem that can’t be overcome, but if there are tricky issues, parties can come up with creative solutions early in the process when they are still feeling positive and working to improve the deal.[2]
It serves as a tremendous tool for the lawyers to guide the M&As to how to go about drawing up the definitive documents. If there isn’t a carefully drafted term sheet, the lawyers will be the ones figuring out how to move forward. If they don’t have clear guidance, they might create agreements that are unfair and one-sided, which isn’t helpful. The confidence and assurance that a well-crafted term sheet provides instill a sense of certainty in the parties involved. Not everything is binding in a term sheet but there is a lot of moral commitment which is attached to it and therefore from just deal confidence standpoint, a term sheet also is animpeccably important tool.[3]
Legal Binding Consideration for M&A Term Sheets
A M&A Term Sheet except few provisions is non-binding in nature. A term sheet being a high-level document, if it is required to be made the entire term sheet binding, then the parties have to delvedeep into details of the deal. By this, there will be protracted negotiations derailing the whole momentum which parties have built up just after the initial deal. So, it is best kept for the definitive agreements.[4]
The other factor is that it may trigger obligations to disclose the transaction to stock exchanges and also possibly trigger filings under competition law if the relevant thresholds are made. A binding term sheet might be suitable in a simple and straight forward deal with minimal complexities, straight forward structure, uncomplicated deal terms, and no warranties. A binding term sheet can also serve the purpose where parties are not willing to incur substantial time and expenses in a definitive agreement.[5]
Legal Enforceability of Term Sheets
A document including a term sheet whether or not it’s binding or enforceable, has its fulcrum on the fact whether it satisfies the tenets of the key ingredients under the Indian Contract Act 1872. Broadly, if a document is entered into the parties who are competent to enter into the contract with a free consent for a lawful object and for a lawful consideration and with the intent to create legal relations that document will be enforceable.[6]
In the context of M&A Term Sheet, the sheet circuits whereas all of these conditions that is also enforceable. Therefore, more often than not since parties want to make a term sheet ordinarily most privileges non-binding, they clearly should spell out which provisions are binding and meant to be enforceable and which are not binding and therefore should not be enforceable. If you don’t do it then there’s a lot of ambiguity and leaves enough room for courts to interpret whether the parties conducted in a manner which demonstrates that they always intended to create legal relationships and that can have unwanted ramifications because term sheet is not a stage where you want to take too many commitments and if the term sheet is not properly worded that can have undesirable consequences.[7]
Which Parts can be Legally Binding
There is no hard and fast rule as to which term should be binding and non-binding in a term sheet. Conventionally are the terms which matters while the parties are still exploring the transaction those are meant to be binding and which are the confidentiality obligations because the seller obviously does not want the buyer to exploit the confidential data sharing during the due diligence exercise just in case a deal doesn’t go through.[8]
Likewise, the buyer would want the protection of exclusivity obligations of the seller so that the seller does not use the offer which the buyer makes and goes around the town to shop for a better offer and uses the buyer as a stocking horse. Likewise, if their cost and expenses related provisions break fee or reverse break fee provisions those should also be made binding and to give teeth to all of these provisions in case, we need to enforce naturally you will need a governing law and a dispute resolution mechanism which should be binding as well. Just in case parties need to take refuge under the judicial forum to enforce a particular binding provision of a time sheet.[9]
Conclusion
The M&A Term Sheet serve a critical tool in terms of identifying deal breakers instilling confidence in the parties and guiding the lawyers to move forward with their diligence and directionally how to draw the definitive agreements. It must spell out very clearly which terms of binding which are not binding act in consistence with the terms of the term sheet. Get the lawyers and advisors involved initially in drawing of the term sheet as well as the primary purpose of a party is to agree to something and to later on realize when to take a step further that is something which will not fly under applicable tax laws or legal provisions or is suboptimal.
[1] MORGAN & WESTFIELD, https://morganandwestfield.com/knowledge/the-term-sheet/ (last visited Dec. 24, 2023)
[2] CORPORATE FINANE INSTITUTE, https://corporatefinanceinstitute.com/resources/valuation/term-sheet-guide/ (last visited Dec. 24, 2023)
[3] Milendra Jain, All you need to know about Term Sheets, TAX GURU (Dec. 25, 2009, 7:29 PM), https://taxguru.in/finance/all-term-sheets.html.
[4]Miura & Partners, When Does a Term Sheet Become Binding? – The Indian Perspective, LEXOLOGY (Dec. 25, 7:40 PM), https://www.lexology.com/library/detail.aspx?g=d1648af8-d50f-4c3d-a9e6-438c4180724a
[5]ibid
[6] LEGISTIFY, https://blogs.legistify.com/blogs/view_detail/11-legal-enforceability-of-term-sheet/ (last visited Dec 25, 2023)
[7]ibid
[8]Jeff Loehr, Can a Term Sheet be Legally Binding?, WESTCHESTER ANGELS, (Dec. 25, 2023, 9:00 PM),https://westchesterangels.com/can-a-term-sheet-be-legally-binding/#:~:text=While%20a%20term%20sheet%20is%20not%20legally%20binding%2C,of%20legally%20binding%20components%20of%20a%20term%20sheet.
[9]ibid
