When entering into a corporate transaction or deal, such as buying a company, selling a business, merging organisations, or starting a joint venture, one of the first documents you need to consider is a Heads of Terms. Corporate deals are proven to run more smoothly with paperwork signed early on in their development. Often signed as a precursor to more detailed legal contracts, a Heads of Terms for a business sale, for example, sets out the core principles that the buyer and seller have in mind. This means misalignments and disputes are less likely to be discovered later, and much less likely to come as a surprise. Although they may seem like a simple formality, Heads of Terms play a pivotal role in shaping deals and protecting your position before you commit to further, potentially, binding obligations.
In this guide, we’ll explore Heads of Terms, corporate deals, and carefully drafted paperwork, why they matter, and what they should include. We’ll share top tips from our corporate law team, as well as common mistakes to avoid. Our blog is not intended to be formal legal advice. It’s also not intended for those looking for a template or sample Heads of Terms. Corporate deals are all different. There are no shortcuts, unfortunately. However, we trust the following will help you navigate your next transaction with more confidence.
Understanding Heads of Terms
The detail varies between different legal jurisdictions, but the term Heads Of Terms describes a document, often a letter, that summarises the main points of a corporate deal before detailed work begins on thrashing out the final contract. They are usually a non-binding statement that serves as a helpful roadmap for achieving future legal agreements.
You may also see it referred to as;
Heads of Agreement,
Memorandum of Understanding (MOU),
or a Letter of Intent.
While the terminology can vary, the function of the document is the same: to capture the headlines of any deal. A successful Heads of Terms outlines the points both sides of a deal have agreed on, providing a shared understanding before the lawyers begin drafting longer, more detailed and more costly contracts.
In the broader deal process, the Heads of Terms sits at the point after the transaction has been floated between parties, but before detailed negotiation and due diligence begins.
For example, a corporate transaction Heads of Terms might describe a future joint venture in principle with shared vision, shared values, shared resources, and a shared goal. It’s not necessarily the place to wrangle over pounds and pence. Instead, it’s a valuable tool to record commercial compatibility between organisations and agree on the fundamental points of any deal. Once signed, both parties can move on confident that the direction of travel is the right one.
Why Heads of Terms Matter in Corporate Transactions
Although a Heads Of Terms is considered advisory and not usually enforceable in its entirety, it serves several vital functions in and around corporate law for business transactions. Firstly, it sets expectations for both sides at an early stage of negotiations. As a result, there should be confidence that all parties are, at least, working from the same page. This reduces the risk of unfortunate misunderstandings or costly disputes arising later in the process. A well-drafted Heads of Terms goes a long way to preventing unwelcome surprises down the track.
Talking of tracks, a Heads of Terms document has an important secondary function. It should act as a roadmap for the deal, setting out a schedule of activity and highlighting the actions required for each party to make signing the agreement a straightforward process with minimal delays. If you’re buying a company, for example, a Heads of Terms agreement can serve as a comprehensive company acquisition legal checklist, ensuring you have all your bases covered before diving into the detailed negotiations.
For businesses seeking external funding or board approval, a well-structured plan expressed within a Heads of Terms can also help to secure confidence from investors and stakeholders by demonstrating that the transaction is likely to progress in a professional manner. Clauses within a Heads of Terms document that cover non-disclosure and protection from competitors can also prevent parties from disclosing sensitive information during the negotiation period.
Most importantly, the Heads of Terms ought to safeguard your negotiating position. It sets a clear framework for the to-and-fro of deal-making by outlining the key commercial and financial terms under discussion. Without M&A Heads of Terms, for example, merger discussions risk drifting into areas not previously discussed or, worse, that are ‘off the table’ from either party.
By taking the time to put key terms in writing carefully, Heads of Terms minimise the risk of misinterpretations or disagreements later in the process. Transparency clarifies the intentions of both parties, making it harder for one side to claim later that they misunderstood.
Finally, Heads of Terms can be used as leverage to hold parties to any original agreement. Referring back to principles laid out at the start of your negotiation can provide leverage and strengthen your position.
What is Included In A Heads of Terms Document
A comprehensive Heads of Terms should address several core components to leave no significant gaps in either party’s understanding of the deal and negotiations to follow. The following list is not meant to be exhaustive. The important thing is to assess what your deal needs. For example, a small business purchase Heads of Terms document will be different to a Heads of Terms for a complex financial services joint venture. Both, however, have the same general contents and purpose.
Identification of The Parties
The first required content is a clear identification of parties to the agreement, as registered, and a short description of their role in the deal. This will often simply be buyer or seller, but could include representative, agent, licensee, or other organisation with an interest.
Transaction Overview
Whether the deal involves the sale of shares, the transfer of specific assets, or a merger, this section needs care. A brief summary of the issue at hand provides the foundation for the rest of the agreement. It pays to aim for complete transparency and clarity here.
Price, Payment Structure Or Equivalent
In simple transactions, this should state a purchase price and, if appropriate, the basis on which the valuation has been agreed. Any payment clause should also set out how and when the payment will be made. Clarity here, even at this early stage, avoids later disputes.
Timetable & Key Milestones
A target completion date and interim deadlines for critical steps such as completing due diligence, obtaining regulatory approvals, and signing the final contracts. Identifying milestones helps both sides to manage expectations and keep the deal on track.
Exclusivity Clauses
This provision commits the parties to negotiate solely with each other, preventing either side from seeking or accepting alternative offers. Without exclusivity, you could invest time and resources in negotiations, only to see someone else beat you to it with a last minute offer.
Confidentiality Agreements
Negotiators are likely to share sensitive commercial, financial, and technical information as part of their deal-making. A confidentiality clause in a Heads of Terms ensures that such information is kept private and secure.
Conditions Precedent
If there are requirements to meet before a deal can be seriously considered, these ought to be expressed clearly in a Heads of Terms document. These could be anything, but typical examples include securing finance, obtaining shareholder agreement, regulatory approvals for products and services, or achieving satisfactory due diligence results. By identifying these ‘conditions precedent’ upfront, you can avoid costly surprises later.
Warranties and Liabilities
Warranties are assurances given by the seller to protect the buyer from future poor performance. Liabilities determine who bears the risk if those assurances turn out to be inaccurate. Describing how warranties and liabilities are to be handled in any deal is a useful clause for any Heads of Terms document.
Termination Provision
Finally, the document should specify termination provisions, setting out the circumstances in which either party can withdraw from the deal and the consequences of doing so, including any penalties or compensation payable.
When reviewing key clauses in heads of terms, it’s important to note that we can only answer ‘what is included in a Heads of Terms’ partly. There will often be unique circumstances around your deal or transactions that need to be addressed. The list, therefore, is not exhaustive and, if you’re in any doubt as to what ought to be included, it pays to get legal advice.
Are Heads of Terms Legally Binding in the UK?
In most cases, a Heads of Terms document is not legally binding in the UK. The purpose is to provide a framework for the transaction and guidance for parties, not to create enforceable obligations for the entire deal. However, there are notable exceptions. Clauses dealing with confidentiality and exclusivity are often expressly stated to be binding and are generally enforceable by the courts. Nobody wants their secrets revealed to competitors during deal-making.
Some parties may wish to include binding clauses in their Heads of Terms in a business sale, for example. These are often around price and cost-sharing arrangements. Governing law is also considered binding. Despite possibly being well-intentioned, such clauses seem to miss the point of a Heads of Terms agreement that should be designed to open up negotiations, not close them down.
By signing a Heads of Terms without taking due care of the legalities you could unwittingly, and prematurely, agree to a binding commitment that disadvantages you during the deal. This is why it is crucial to seek legal advice before signing a Heads of Terms or equivalent document. An experienced lawyer can ensure the document reflects your intentions and does not expose you to unwanted liabilities.
Common Mistakes to Avoid
Warranties are assurances given by the seller to protect the buyer from future poor performance. Liabilities determine who bears the risk if those assurances turn out to be inaccurate. Describing how warranties and liabilities are to be handled in any deal is a useful clause for any Heads of Terms document.
Overcomplicating The Document
One of the biggest traps Heads of Terms fall into is trying to cram too much legal or technical detail into a Heads of Terms document, which should focus on commercial headlines. It is important to remember that a Heads of Terms describes intent, leaving agreement on the finer details for the future. Limit Heads of Terms’ content to the headlines, and you’ll avoid slowing negotiations and frustrating the other side before you’ve even started. How detailed should Heads of Terms be? The answer is typically less than you’d imagine.
Omitting Key Protections
Failing to include clauses on confidentiality or exclusivity can significantly weaken your position during any deal. Without confidentiality obligations, sensitive commercial or financial information could be disclosed to the marketplace. Without exclusivity, the other party is free to negotiate with others, meaning your time and resources could be wasted if they accept a better offer.
Using Ambiguous Language
A Heads of Terms is supposed to reduce uncertainty, but vague drafting can do the opposite. Ambiguities in how the price is calculated, what assets are included, or how conditions precedent are to be satisfied can lead to disputes later in the process. Clear, precise wording is key to making the document a reliable roadmap for the deal.
Treating the Heads of Terms As A Contract
It’s important to remember that a Heads of Terms is a preparatory document. While it may feel like the deal is “done” once the Heads of Terms are signed, the real negotiation begins. If you ‘lock in’ terms too early, you may resist making necessary changes when new information comes to light, potentially jeopardising the transaction.
Failing To Take Legal Advice
Signing a Heads of Terms without professional input is risky. Without specialist contract review and negotiation skills, mistakes are all too easy and can have significant commercial consequences. Without mergers and acquisitions legal advice from specialists, you could accidentally agree to obligations you didn’t intend, miss opportunities to strengthen your negotiating position, or expose yourself to unnecessary losses.
Avoiding these mistakes helps ensure that your Heads of Terms serves its purpose: providing a clear, reliable, and fair starting point for your next corporate deal.
Need Help With Heads of Terms For A Corporate Deal?
At Jamieson Law, we specialise in helping clients prepare, review, and negotiate Heads of Terms that protect their interests from the outset. The same is true of Letters of Intent, Memoranda of Understanding, and Heads of Agreement. Corporate law understanding can add considerable value to the process of signing deals whatever terms you use to describe the paperwork.
The Jamieson Law team can help draft clear, robust documents tailored to your specific transaction or review existing Heads of Terms to identify potential risks. Our expertise extends beyond this initial stage through due diligence, contract drafting, and completion to ensure your corporate deal runs smoothly from start to finish.
A well-prepared Heads of Terms for a business sale, merger, or joint venture is not just a procedural step; it is the blueprint for your corporate deal. Getting it right can save you time, money, and frustration, while helping to preserve goodwill between the parties. By setting out the key terms early, you can move forward into due diligence and final contract drafting with clarity and purpose.
If you’re about to enter into negotiations, our specialists in corporate law for business transactions can provide mergers and acquisitions legal advice. Our team will work with you to ensure your next deal starts on a firm footing and is guided through to successful completion.
