Five Considerations for Term Sheets
Regardless of the type of transaction, the following should be considered before entering into any term sheet.
• Spell Out the Deal Terms with Specificity. Although term sheets are generally not binding, spell out the transaction terms with as much detail as possible to avoid future misunderstandings.
• Deal with the Deal Breakers. Discuss and agree upon the resolution of known potential deal breakers in the term sheet, so the parties can determine if common ground exists, before spending lots of time and money in due diligence, negotiations and drafting definitive agreements.
• Non-Binding. Unless the parties intend otherwise, always clearly specify that the term sheet is not binding on the parties until a definitive agreement is entered into and signed by all of the parties.
• No Shop. A no-shop provision restricts a party from having any third-party discussions or negotiations regarding an alternative transaction for a specified period of time. It prevents one party from using a term sheet to negotiate a more favourable deal with others, while the other party spends time and money conducting due diligence, and negotiating and drafting definitive documents. If you will benefit from a no-shop clause, try to negotiate a broad and lengthy provision, with some minimum fixed penalty for violation of the provision. If you do not benefit from a no-shop clause, try to negotiate a short and narrow provision, which provides for its expiration upon early termination of the letter of intent.
• Confidentiality. Always include a confidentiality provision that includes equitable remedies in case of default.
The information contained in this article is strictly for educational purposes and is not intended to be legal or tax advice or to be relied upon by anyone without doing their own research, and consulting with legal and tax advisors.