What Are Heads of Terms and Are They Legally Binding?
Heads of Terms play a key role when a new commercial transaction is agreed upon in principle. This type of agreement, often also referred to as a letter of intent or potential interest, helps to guide the subsequent formal negotiations. This article will outline the answers to key questions surrounding Heads of Terms, including what they are and whether they are legally binding.
What are Heads of Terms?
Heads of Terms (HoTs) set out the key terms and conditions of a proposed transaction. HoTs are generally prepared after the seller and potential buyer have entered into negotiations and come to an agreement; as such, the Heads of Terms will set out what has been agreed between the parties. The agreement can then be used as a foundation for the transaction moving forward and ensure that both parties are on the same page.
What is usually included in a Heads of Terms agreement?
The most common elements that are included in this type of agreement are as follows: –
- The details of the main contracting parties.
- Key agreed terms of the transaction.
- Price and how it will be paid and/or adjusted.
- Purpose of the transaction (i.e. acquire, merge, etc)
- Timescales, including timescales for the actual transaction and any issues or terms that need to be agreed by a certain date.
- Confidentiality, exclusivity and non-solicitation clauses.
Are Heads of Terms legally binding?
One of the key features of Heads of Terms is that they are not legally binding. However, sometimes, specific clauses in the agreement are legally binding and enforceable. In these cases, these legally binding clauses usually relate to the following: –
- Exclusivity provisions – to protect the buyer and seller by preventing either party from negotiating with other parties during a set timeframe.
- Confidentiality provisions – The seller and buyer will both request sensitive information during the negotiation process to ensure any information provided remains confidential.
- Non-solicitation clause – due to the intensive and generally open access nature of a transaction, parties may seek to prevent the poaching of employees, clients or customers.
It is important to note that any terms that have been negotiated as legally binding are expressed as legally binding in the Heads of Terms. It is important to instruct a solicitor to review your agreement so that you are fully aware of what is legally binding and what is not.
What happens after the Heads of Terms are agreed?
Once the terms are agreed upon, the next stage would be to draft the main contract (such as a share purchase agreement or an asset purchase agreement). This contract will be fully comprehensive and legally binding on both parties. It will include details such as how consideration is paid (including any mechanisms for payment or calculating the purchase price), warranties and indemnities, accounts, restrictive covenants and dispute resolution clauses.
These are only some of the provisions in the main contract. Depending on the size and nature of the transaction, some contracts can be over 100 pages long.
We would therefore strongly recommend that you instruct a solicitor from the outset to prepare your HoTs, as a well-drafted Heads of Terms agreement can ensure a smoother transaction and less time and costs towards drafting and negotiating the main contract.
Here at GA, our team of expert corporate and commercial solicitors in Plymouth are more than happy to assist with drafting or reviewing your HoTs and the proposed transaction once terms are agreed. Whatever stage of the process you are at, please get in touch by calling 01752 203500 or emailing enquiries@GAsolicitors to discuss your matter further.
You can also read our latest article about shareholders’ agreements here.
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