BJ,
From Toronto to LA would be nice.
Here's something I found on "Heads of terms" an apparently
european usage.
Heads of terms are generally contained in a short document, also known as a letter of intent, memorandum of understanding or heads of agreement. In essence, this document is an outline of the terms that the parties have agreed in principle in the course of negotiating a proposed transaction. Heads of terms evidence serious intent and have moral force but do not legally compel the parties to conclude the deal on those terms or even at all.
Heads of terms are used in a variety of transactions, including mergers and acquisitions, joint ventures, project financing and private equity investments.
There is no standard form for heads of terms. They can vary from a simple letter (which is probably the most common format) to a formal deed. Similarly, there is no convention as to who prepares the heads, although it is more common for this to be initiated by the purchaser, investor or lender.
Heads of terms can help to avoid misunderstandings and provide a useful "road-map" for the steps to be taken on the way to signing the formal agreement, but if negotiation of heads of terms stalls over points of unnecessary detail, this can delay preparation of the definitive documents and increase the length and cost of the negotiations.
Heads of terms are used for a number of purposes:
As written confirmation of the main terms agreed in principle.
To outline the timetable and obligations of the parties during the negotiations.
As a framework for certain preliminary binding clauses such as a "lock-out" (exclusivity) agreement.
Heads of terms are commonly entered into near the beginning of the transaction, once preliminary terms have been agreed and before commencement of detailed due diligence and drafting of definitive agreements.
REASONS FOR USING HEADS OF TERMS
Heads of terms are usually considered to confirm a moral commitment on both sides to observe the terms agreed (which can be both an advantage or disadvantage depending on the circumstances). It is psychologically harder for one party to renege on earlier commitments if they are recorded in formal heads of terms.
Heads of terms may be particularly useful in complex transactions. They can help focus the negotiations and, by highlighting major issues at an early stage, prevent the parties wasting time and money.
Where either party is listed, heads of terms can spell out the proposed agreement in detail, without accelerating the obligation to make a public announcement. (US securities regulations may, however, in certain circumstances require disclosure of a proposed transaction by a US listed company prior to signing of a definitive agreement.)
Heads of terms can provide the framework for certain binding commitments which are important at the negotiating stage even while there is no agreement on the main commercial deal. For example, they frequently contain a binding "lock-out" (exclusivity) agreement (see "Lock-out agreements"), a confidentiality agreement (if a separate agreement has not already been entered into) and, in some cases, provide for payment of costs in the event of negotiations breaking down.
Where a deal has to be explained and "sold" prior to contract to persons not directly involved in the negotiations, the heads of terms can provide a useful statement of the key terms of the proposed deal. These people might include the main board of directors of a large group where negotiations are being handled at a lower level, prospective underwriters or lenders, or non-management shareholders in a private company sale.
Heads of terms can provide the basis for a joint submission for clearance or guidance from the relevant competition authorities and may assist the preparation of tax clearance applications. For example, Hart-Scott-Rodino filings to the US anti-trust authorities can be based on the heads. |
