Term sheet is written document signed between the Parties which sets out the high level, key terms or important terms and conditions of the prospective deal. It summarizes the main points of the agreed terms. Terms of a commercial transaction agreed in principle between parties are reflected in Term sheet. Term Sheet is called by different names like letters of intent, memoranda of understanding, heads of terms, letters of potential interest, protocols and so on. Whatever the name may be but serves same purpose.
Purposes of Term Sheet: Recording of key terms in written forum prior finalizing the detailed contractual terms between the potential parties for the proposed business transactions.
Use of Term Sheet: It is primary document often used in more complicated commercial transactions or large deals with view to have record of agreed principal terms in writing. Term sheet always lists out the broader and key terms and acts as template/guide to draft the definitive and main agreement. It is signed prior to signing of Agreement in scenarios such as proposed M&A, buying assets, sale of assets or any other large deals or IP acquisitions, joint ventures, business collaborations, tech transfers, investment deals and so on.
Illustrative list of uses of term sheet
- Helps in recording commercial transaction at early stage with regard to principle agreed terms
- Helps the parties to address any misunderstandings or problems or concerns
- Guide and framework to draft definitive and main Agreement
- Framework of terms and conditions which need to be satisfied before binding documentation can be entered into
- Aids to outline of the process with regard to due diligence
- Provide timeframe for negotiation and completion of the transaction
- Outlines the binding / partially / non-binding nature of the commercial transaction which have been agreed between the parties
- Basis for future agreement
Whether Term Sheet is Binding or Non-Binding?
Explicit mention of binding or non-binding. Additionally, it depends on intention of the parties whether they intend it to be legally binding or not along with language used in provisions of the term sheet. Alternately the parties decide and make term sheet semi binding or partially binding based on the requirement. But the crucial element one should pay attention to the aspect that based on the party’s intention. It needs to clearly mentioned that term sheet binding or non-binding and only few provisions are binding then expressly mentioned in it which provisions are intend to bind in the term sheet. Never, make the term sheet binding without intention to bind it and not paying to attention to language used in while drafting term sheet.
Transverse of term Sheet from non-binding to binding without intention to bind by use of language in the term sheet provisions will have severe legal consequences.
Seek help from the expert commercial legal profession before signing term sheet. Clarity is core in the term sheet to make it biding or non-binding. Just don’t get trapped without mentioning the binding & non-binding nature of term sheet & spell intention to bind or non-binding in writing.
Inferences & Suggestions
Are you an entrepreneur? Are you founder or co-founder? Are you proposing to acquire the business or sell your business? Are you considering business collaboration? Do you propose merger or acquisition? Are you planning IP acquisition? Do you propose tech collaborations? Do have startup and looking for expansion? If your answer yes then considers recording of proposed terms in writing at the stage of early-stage discussion via Term Sheet. Explicitly mention whether the term sheet is binding or non-binding or certain provisions of the term sheet are binding. Clarity is core to avoid unwanted repercussions of getting trapped by binding obligations by execution of term sheet without intending it.
