A heads of terms document is used towards the start of a commercial transaction, and is used to set out the principle terms of agreement between the parties before substantive drafting takes place.
While, save in certain circumstances, heads of terms are non-binding, they may prove useful in bringing matters to a swift conclusion. Some of the main benefits of using heads of terms are considered below.
Giving a useful summary for all parties
Following negotiations between the principles involved in a deal, heads of terms may prove useful in summarising the key points of the deal to other members of the company. These can also be passed to your third party advisors, such as your solicitors and accountants, to assist in instructing them.
Bringing a sense of commitment
While non-binding, once heads of terms are in place, it is often difficult to overturn points which are set out in them. They are seen as representative of the parties’ wishes, and as such carry a sense of commitment to the points raised, if only psychologically, making it difficult for an unscrupulous party to try to renege on part of the deal.
Providing a framework for complex deals
Having heads of terms can provide a clear framework for the deal, especially where the deal is complex. They will often set out the relevant documentation required and the key points in each, highlighting the major issues involved. Where any of these issues are deal-breakers, flagging them up at an early stage may prevent wasted time and cost down the line if they cannot be resolved at this stage.
Spelling out obligations
In addition to the general impetus provided by heads of terms, they will frequently contain certain clauses which are legally binding. These may include obligations of confidentiality, an exclusivity period during which each party agrees not to negotiate with third parties, and potentially agreements relating to costs and fees in the event that negotiations break down.
However, heads of terms are not always beneficial in every transaction. For smaller, more straightforward transactions, they may simply lead to duplication of work, where the parties would be better to go straight to drafting transactional documents.
Parties should also be careful not to negotiate documents twice. Heads of terms should be used only to deal with key points of the deal, and anything which may be considered to be unusual or exceptional to the specific circumstances. General points of negotiation should be left to the drafting phase of the deal process.
Also, where heads of terms have been agreed without professional advice, it can be problematic where a party is advised that a point agreed in the heads is actually disadvantageous, preventing them (morally, if not legally) from seeking to reopen the point in question. It is important therefore to get input before signing off the heads of terms on technical areas.
As a rule, therefore, heads of terms can be beneficial in providing clarity and focus for a transaction, hopefully to lead to a swift conclusion. However, they should not be used for the sake of it, and the parties should consider the benefit they envisage from heads of terms before putting pen to paper.
For more information on this matter, or any other issues relating to mergers and acquisitions, please contact David Filmer on 01772 258321.