What is Role of Term Sheet from M&A Perspective?

In M&A transaction term sheet is primary document that contains the key terms of proposed transaction of merger or acquisition. During stage of negotiation and prior finalisation of the deal of merger or acquisition term sheet plays crucial role.

Term Sheet outlines the in principle agreed terms by parties in writing. It is foundation upon which the future, definitive and formal merger or acquisition agreement will be drafted and executed.

Term sheet acts as guide during early negotiation of proposed transaction, either merger or acquisition and it is base for the main and definitive agreement.

Term sheet ensures both parties are on same page prior spending substantial time and resources into the due diligence and legal phases.

For negotiations perspective term sheet is extremely helpful crystallise the parties’ intentions and acceptable terms and conditions at high level.

Term sheet is guide to reach a joint beneficial agreement.
Prospective parties to the M& A transaction needs keep in mind balance between interests, of both the parties and reach collaborative and benefitable arrangements b between them.

Negotiation of merger or acquisition   generally involves complex and challenging processes due to which usually require, several round of discussions prior reaching consensus arrangement.  In order to negotiate   and navigate discussions between the prospective acquiring and target parties   several revolving discussions around crucial aspects of the proposed merger or acquisition.  For the aspects like due diligence, consideration and payment provisions, restrictive covenants, representations and warranties.

From legal standpoint term sheet can be binding or non-binding upon depending upon the party’s intention and language used in the term sheet. Along with the facts and circumstances of the proposed transaction. Typically, across different industries prevailing practice is term sheet are non-binding except certain provisions like confidentiality, exclusive dealing during the negotiation period, governing law and dispute resolution.

Term sheet is instrumental in reaching understanding between the fundamental terms of the deal of acquisition or merger. Term sheet provisions boosts clarity and infuses transparency.  Addressing key points early on reduces the likelihood of misunderstandings and misinterpretations during later stages of negotiations.

Key Clauss of Term Sheet from Seller’s Perspective

During the negotiate stage,inclusion of several key clauses by seller are crucial to protect its interest. Some of the illustrative key clauses are discussed herein below:

• Due Diligence: Satisfactory due Diligence by the buyer which is generally condition precedent to the execution of proposed merger or acquisition transaction is vital. Sooner the buyer performs the due diligence and satisfies the buyer as to the existence of demonstrated business and Seller’s compliances in place it is better to the seller itself to consummate the transaction of merger or acquisition.

• Non-compete &non solicit: These restrictive components are usually found in the M&A transactions. But for Seller it is imperative negotiate effectively these terms prior accepting is pivotal. As these restrictions are seller obligations comply. Longer the duration of these terms beneficial to buyer in acquisition transaction. Seller’s freedom of trade, business or profession may be curbed. Reasonable and acceptable terms in regard in line with law are vital to protect the seller. Negotiation on this front prior committing is must.

• Consideration & Commercials: Consideration being is a critical component of any M&A transactions. Complete clarity between Parties with regards to commercials for proposed merger or acquisition is crucial and helpful. Inclusion of detailed terms of the consideration and its milestones are vital to negotiate and add in the term sheet. Payment terms & currency of payment better to defined in term sheet. Consideration being is a critical component of any M&A transactions.  It is always better if the term sheet outlines these aspects.  Seller needs to ensure handing over full control to other party happens upon receipt of the agreed consideration and prior in case of acquisition.  For merger it is quint essential to receive all the agreed consideration before forming merged and new entity.

• Exclusivity: Exclusivity Provisions or no shop during the negotiation period helps in preventing seeking out other potential seller or buyers respectively during the negotiation period. This gives a fair chance both the Parties to complete the deal within the agreed timeline.  From Seller’s perspective it is always good to first identify couple of suitable buyers before reaching the term sheet and agreeing upon the no shop for the two or three duration or agreed timeline of no shop while negotiation and due diligence ae taking place.

Illustrative exclusivity dealing provisions: Until three months from the effective date term sheet or the termination of this term sheet as provided in this both the parties not enter into any discussion, negotiation, arrangement, agreement with any third party or provide information to any other company or firm or other person legal or natural, or solicit in any form or encourage, entertain or consider any inquiries or proposals, with respect to the acquisition or merger.

• Limitation on Liability: It is crucial for the seller to limit its liability in these kinds of transactions. Capping the liability to the consideration received helps to protect the interests of seller. Ensure to limit liabilities in all feasible ways.

• Confidentiality Provisions: It is essential to include these provisions protect the proprietary information of both parties. Most importantly seller will be providing the business sensitive information and financial report. Spelling post termination of term sheet confidently obligations is crucial and these provisions helps in protecting know-how, IPRs and proprietorial information. These provisions needs to surviving terms and binding upon termination is always suggestable.

• Governing Law: Inclusion of provisions pertaining to the jurisdiction whose laws will govern the term sheet & transaction. Determining the mechanism for resolving disputes is crucial. Better to provide for alternative dispute resolution

• Timelines: Agreeing upon timelines are pivotal in the complex transaction of merger or acquisition especially considering its efforts, resources and time for the due diligence and investigations. Without these provisions consummating of the transaction may be difficult. Negotiating an M&A transaction involves an huge amount investment of time, money, and resources. Term sheets act as an efficient checkpoint to ensure that both parties are in agreement on the fundamental terms. All before proceeding with more time-consuming activities like due diligence and legal drafting.

Illustrative clause of timelines: The parties agree to negotiate in good faith, and to use their best efforts to in line with timelines listed herein in this term sheet. Timelines to execute this term sheet with respect to the proposed acquisition of business as expeditiously as possible, on or before one hundred twenty (120) days;

• Existing Employees related provisions: The term sheet needs to address the treatment of employee’s post-acquisition or post-merger.  Retention or redundancy being seller negotiate for employee retention or better benefits in case exist.   In order to protect the interests of the employees Seller’s efforts are required during the negotiation and provisions in this regard in the term sheet. It’s not only giving clarity and fulfilment of moral obligations but also helps fulfilling the legal compliances.

• Execution of Definitive Agreement: Inclusion of the timelines and terms & conditions pertaining to signing of the definitive Agreement with regards to proposed transaction of acquisition or merger is loaded with lot of benefits for both the parties and helps in smooth transaction and transition. Plus, define for whatever reasons if the Parties fail to sign the Definite Agreement within the agreed timelines detailed herein then this Term Sheet what are consequences like termination or

Provisions for finalization and execution of all documents required for the acquisition of the business including execution of ‘Definitive Agreements’ and any other additional documents in form and substance satisfactory to the Parties detailing the rights and obligations of the parties along with the commercial terms of the transaction shall be required to execute to consummate the transaction and effectuate in line with the timelines stated herein under. Keep provisions open to add in detail in definitive agreement like operational aspects, outlines detailed commercial terms, responsibilities of each party, timelines for complete acquisition including terms for smooth transition.

• Representations and Warranties: Representations and warranties are important add to term sheet at high level. Assurances made by both parties’ representation & warranties concerning the accuracy of information shared during negotiations. These ensure that both sides are transparent and honest about their financial and operational status.

• Binding Provisions: Ensure to clearly spell nature of term sheet binding o non-binding explicitly. Usually, this document is non-binding except terms like confidentiality provisions, exclusivity provisions during the negotiations, governing law and dispute resolution provisions. Intentions of parties with regard to binding or non-binding should be reflected clearly.

Inferences

Role of term sheet in early stage of merger or acquisition transaction is indispensable. It not only helps in the smooth negotiations but infuses clarity and boosts understanding. Most importantly it reduces the risks of misunderstandings. Risk of losing the propitiatory information is addressed by this document. It is evidence and record of the prospective transaction.  Guide and road map.  During these kinds of negotiations seller needs to educe or mitigate to get exposure unwanted risks and additional liabilities which is manageable with the well drafted and negotiated term sheets. Sell side also need to take professional legal help to effectively mitigate and manage risks associated with the proposed acquisition or merger.