The lawyer's role in negotiating heads of terms

Everywhere one looks these days, there are offers of free legal documents available for clients to download without a further moment’s thought. This is especially true when it comes ?to the availability of heads of agreement, otherwise described as heads of terms, letters of intent, or memorandums of understanding.

Consequently, it has become even more important for practitioners to ensure their clients recognise the merit of engaging with them, in order to best protect their interests and increase the likelihood of the transaction reaching a successful conclusion.

The truism that whoever prepares the first draft controls the deal remains as relevant to heads of agreement as the main documentation itself: this is the first opportunity to shape the transaction.

Too often, lawyers can find themselves presented with the task of preparing a sale and purchase agreement based on heads produced by the client’s accountants or financial advisers.

It cannot be stressed too strongly how important it is ?to stay sufficiently close to clients contemplating a business sale, so that they can take full advantage of their lawyer’s experience to steer them through the deal. After all, most practitioners meet the problems on a regular basis, whereas clients may only meet them once or twice in their business lives. 

Many of the issues which ?cause a deal to crater at the ?due diligence stage, such as employment or intellectual property issues, are overlooked by the corporate financial advisers who, in recent years, have taken it upon themselves ?to draft and negotiate heads ?of terms. 

Issues to flag

Obviously, heads of terms must meet the fundamental objective of recording, in plain, simple language, the essential points agreed between the parties ahead of their entering into a formal sale agreement, but, inevitably, in many cases there is more to it than initially appears the case.

It is not just the terms which the parties have determined as material that need to be recorded; what a seasoned practitioner will also be able to flag are those issues which might not at first have been apparent.

Surprisingly, in some cases there is even a failure to recognise the importance of stating categorically that the agreement is to be subject to contract, or the parties overlook the need to identify or carve out those specific clauses which should be contractually binding from the off, such as those dealing with confidentiality. 

Often there is merit in including a binding provision requiring professional costs ?to be paid if one party unreasonably walks away ?from the deal.

Further, providing for confidentiality until a deal is formally signed, especially where confidential information is going to be provided during the due diligence period, should never be overlooked.

Indeed, the general assumption that heads of agreement are never legally binding has to be treated with caution, especially where there is an overseas element in a proposed transaction. Other jurisdictions (such as Australia) may in some circumstances regard them as binding, so do not disregard taking specialist local advice where appropriate.

Care has to be given to ensuring any conditional aspects of the proposed transaction are clearly stated: many deals are going to be subject to third-party finance and calling for evidence of funding (at least in principle) at this stage may avoid wasted costs. Often there will be regulatory issues or board approval to be obtained. ?Try also to clarify the level ?of due diligence which the purchasers going to carry out.

Often participants fail to ?set out clearly in the heads ?of agreement the specific obligations of the parties ?that will be required during ?the period of negotiation. Overlooking the requirements to cooperate in providing documentation, general assistance, and disclosing accounts and data can swiftly derail a transaction.

Try to set out a realistic timetable at the start of the transaction, so that all the parties (including advisers) understand the timeframes ?to which they will be requested to work.

It is undoubtedly essential ?to record the terms agreed between the parties clearly ?and unambiguously, to avoid any misunderstanding and to provide a thoroughly adequate checklist and source document for the advisers when they ?come to drafting the main agreements. This also provides ?a useful opportunity for the lawyer to reinforce their importance to the client.

Jonathan T R Silverman is head of commercial law at Silverman Sherliker @thelegalview www.silvermansherliker.co.uk