Perfect Merger Term Sheet

What Is the Perfect Merger Term Sheet?

Mergers & acquisitions (M&A) transactions are classified as complex transactions that require the conclusion of related agreements. This approach protects the interests of both the seller of shares and the buyer. The term sheet is created not to miss the details of the mergers of companies. So, what should be included in the perfect Term Sheet?

The role of the Term Sheet in M&A deals

M&A transactions in the corporate control market are accompanied by the transfer of ownership and control over the company from former shareholders to new ones. At the same time, an individual or a company buyer is an outsider about the company target.

The main stages of M&A transactions include:

  • Preparatory stage (financial modeling, selection, the definition of the deal object, analysis of potential investors, evaluation of synergistic effects, etc.);
  • kickoff meeting (kickoff meeting of the project participants), selection and determination of the team; 
  • signing by the parties of the Term Sheet (agreement of intent, agreement on the main financial, economic and legal parameters of the project), assurances of circumstances, etc.;
  • due diligence, a comprehensive assessment of the investment object with the involvement of consultants in various fields (tax consultant, legal consultant, financial consultant, technical consultant, etc.);
  • deal structuring (determination of specific conditions, subjects, place of conclusion, terms, stages, and procedure for conducting an M&A transaction);
  • Implementation of the M&A deal;
  • Evaluation of the results of the deal.

What is a term sheet?

A term sheet is an agreement that will fix the basic terms of a future deal followed by the signing of the main contract. In a broad sense, an agreement of intent is a listing of the main conditions for a future sale. As a rule, it is not legally binding but may contain clauses on fines and reimbursement of expenses in a negative scenario.

There are situations when the parties are already ready to agree, but after discussing the first draft of the term sheet, they disagree. For example, they understand that they have different values ​​or views on business. A Term Sheet is convenient because it can be the basis for legally binding documents of the planned transaction. For example, it can be a draft for a contract for the sale of shares in the authorized capital of a company and a corporate agreement – the provisions from it can be applied in different documents. However, unlike a contract, violation of the terms of a term sheet in most cases carries reputational risks, not legal ones, although there are exceptions.

Term Sheet usually includes:

  • key terms of the investment deal;
  • amounts, terms of investments, size and number of tranches;
  • approach to evaluating a business project;
  • the procedure and terms for concluding and executing the main contract;
  • other mutual obligations of the potential investor and the company.

On the one hand, this document should provide all points of principle for the parties. On the other hand, be concise and fit in one maximum of two pages. A professionally compiled term sheet reflects the basic commercial terms of a future transaction and records the verbal agreements reached. Usually, such a document has no legal force. However, this point is better written in the text itself. Sometimes, an agreement of intent is recognized as a preliminary contract, and its non-compliance imposes penalties.

In addition, considering that M&A transactions involve many specialists, such an agreement serves as a “road map” for them. It also should be mentioned that the Term Sheer can be created with the help of ready-made templates in a virtual data room. This software helps to automate the conduction of legal business operations.

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