The article introduces all the fundamentals one needs to know about a term sheet. Read this blog to understand everything about the same.
A term sheet is merely an indication of a potential commercial transaction between the seller and the buyer and is not a contract or a legally binding agreement. Until and unless the parties to this agreement execute final agreements, no party will be obligated for the transaction.
You may have considered using formal contracts when working with suppliers or customers as a budding entrepreneur or owner of a small to medium-sized firm. That line of reasoning is sound, but often the signed paper does not truly offer enough security for your company. As a result, we often run across situations when a term sheet is used instead of a formal agreement.
A term sheet is a document containing only the key terms and conditions that the parties expect or desire to agree upon. Among other things, a term sheet would likely include the following:
- The parties names
- The service or items being sold
- The required payment amount
- The payment conditions
- Perhaps the contact information for each side.
Generally speaking, these would tackle the most significant issues and skip over the little details.
There is nothing wrong with this, but relying only on this agreement if things do not turn out as you expected could be disastrous. Term sheets are not generally described as binding, but if parties sign one and no other agreement has been created, it may become the final agreement.
Is a term sheet a document?
A term sheet is a document that serves as the basis for discussions and negotiations before a formal agreement is drafted. Using a term sheet involves negotiating with the counterparty & outlining the critical conditions of the transactions so that everyone is clear and on the same page. The actual drafting of the agreement will be much simpler once the terms are settled upon in the term sheet.
The key terms of a deal are outlined in a term sheet, letter of intent, or memorandum of agreement, and three similar preliminary transaction documents (the primary variation being style). Term sheets may have the moral force and show the parties’ sincere desire to enter into a definitive transaction agreement based on their terms.
Still, they typically do not have any legal staff and do not obligate the parties to complete the transaction on the terms stated in them or even at all. Even though term sheets are usually not legally binding, some do contain stipulations (for example, confidentiality or exclusivity).
Term sheets are used in various business talks, mergers and acquisitions, financing agreements, joint ventures, and real estate deals. The term sheet is typically annexed to a promise letter from the creditor in a financial transaction.
Although term sheets are also utilised in private placements, their meaning is significantly different in this context. Depending on the offering’s size and kind, the content of the term sheet changes.
For instance, if a high number of authorised investors are included in the private placement—the term sheet will typically be a summary of the terms of the offering without going into great detail about the issuer’s operations or the conditions of the securities. It is frequently annexed as a schedule to the subscription agreement given to investors and the engagement letter between the issuer and its underwriter.
The term sheet often contains a list of non-binding transaction terms in such cases. A term sheet for a private placement may be regarded as an offering memorandum if it includes details about the issuer’s operations and affairs. An offering memorandum must have a statutory right of action, allowing investors to cancel their investment or sue for damages under applicable securities laws.
How does a term sheet vary from a contract?
Based on the agreed-upon term sheet, the actual agreement will be prepared. To eliminate any ambiguity, it would first write out the conditions of the transaction in considerable detail and the appropriate language. Second, the contract will be prepared with all the legal safeguards to guarantee that all parties’ rights are appropriately protected.
Governing legislation, secrecy, intellectual property, default events, force majeure, and many other provisions, etc. will be listed in an agreement. Yet, if a term sheet serves as the only contracting document, you can overlook these crucial provisions of a contract.
The two-step procedure of discussing the terms & conditions on a term sheet and then creating the agreement may seem pointless, but keep in mind that if it is not handled correctly, a change to one clause may impact other clauses. Therefore, these two documents must be appropriately created and managed to ensure your company has the necessary tools.
Key Points
When you’re a party to a business deal, a term sheet that has been carefully designed will be a crucial step in effectively closing the deal. There are many factors to consider when deciding on the actual commercial conditions for the sale of a business. These consist of the following:
- What assets will be offered for sale
- The prerequisites needed for the specific transaction
- According to what the parties agree, a term sheet may be binding or non-binding.
- To ensure you are adequately covered, ask for help when preparing or reviewing your term sheet.
Last Words
Except as expressly agreed to in writing by both parties, a term sheet will not be deemed legally binding. The agreement should specify whether the parties intend for the deal to have legal force. The term sheet should be specific, if binding, and solely subject to the creation of formal legal documentation.
Additionally, it should specify every clause included in the later legal paperwork that the parties will produce, if at all possible (or their legal representatives). If it is non-binding, the parties may have an in-principle understanding of the essential terms, or it may take the form of a proposal rather than a written agreement between the parties outlining the terms offered by the party. If you need more information about the same, feel free to contact Vakilsearch
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