Head Of Terms

Heads of Terms (HoTs) are a transaction document that outlines the key commercial terms and fundamental principles of a deal.

What are Heads of Terms?

They are typically used in a variety of corporate transactions to allow the parties to agree on the basic commercial principles such as involved parties, cost, funding of transaction and the transaction structure.

HoTs are typically negotiated at the beginning of the transaction and the goal is to ensure the principle terms are agreed by all parties and to provide security during the early negotiation and due diligence process. The parties will typically negotiate the fundamental terms of the deal to ensure they are protected and do not incur undue delays or disagreements later down the line.

It is typical to read that HoTs are non-legally binding which often leads to the assumption that they are not useful or necessary to transactions. To some extent, it is correct that the core commercial terms of the HoTs are not legally binding, but instead they offer a steer to all parties as to how the transaction is to proceed. However, there are terms that will often be included in HoTs that will be legally binding and enforceable from day one, if drafted correctly. These include confidentiality and exclusivity provisions.

Why are HoTs important?

HoTs are important for the following reasons:

Key terms to look out for in HoTs

Exclusivity – This clause in the HoTs restricts parties (usually the seller) from negotiating a deal with other potential buyers for a specified period of time. The purpose of this is to enable the proposed buyer to conduct the appropriate checks and due diligence without competition. It is important that an exclusivity provision is included in your HoTs whether you are the buyer or the seller as it offers protection for the buyer who is assured they can invest time and resource into the transaction and demonstrates commitment from the seller to enter into negotiations.

Confidentiality – The purpose of this clause is to protect sensitive information and to build trust between the parties. It is a protection for both parties to protect important company information that is disclosed during any negotiation or due diligence procedures. A confidentiality clause is legally binding and can be enforceable in court if breached.

Costs – This clause is essential in well drafted HoTs as it outlines the liabilities of the parties in relation to covering their incurred costs. It is common that the HoTs will specify each party must cover their own costs in regard to the transaction, whether or not it reaches completion. Without this clause, there could be ambiguity as to who is liable to cover what costs, particularly if significant costs are incurred and the deal does not complete.

Structure and scope – It is important to clarify and define the key commercial points agreed by the parties. This manages any future risks or misunderstandings and helps to provide certainty as to which party is doing what and the level of due diligence that is required.

Impact of not having well drafted HoTs

The most significant impact of not having well drafted HoTs at the outset of the transaction is the amount of time and money that can be put into a transaction for it to then fall through as fundamental commercial terms cannot be agreed on at a later stage.

Therefore, when agreeing HoTs, you should ensure they provide a workable solution to all of the fundamental principles that the transaction is to rely upon, e.g. costs, liabilities of each party and level of due diligence required. There should be no clauses that defer agreement, or in other words, agreement to agree clauses as these are notoriously impractical and almost certainly going to cause future delays or potentially disagreements.

Getting the HoTs right at the outset before any of the long form drafting commences provides security for the parties in knowing that the fundamental aspects of the transaction are agreed upon prior to the commencement of extensive document drafting.

If you are thinking about selling your business or buying a business or have intentions to enter into a business transaction that will require HoTs, please don’t hesitate to contact our award winning Corporate and Commercial team who would be more than happy to help.