Heads of terms

Also known as letters of intent, memoranda of understanding, heads of agreement, letters of potential interest, term sheets or protocols. A document which sets out the terms of a commercial transaction agreed in principle between parties in the course of negotiations. 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. However, provisions relating to confidentiality and costs may be binding on the parties.

Heads of terms are used in a variety of loan finance and other transactions, including public mergers and acquisitions, joint ventures (www.practicallaw.com/6-107-6312), project financing and private equity (www.practicallaw.com/3-107-7539) investments.

They 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 legally binding clauses such as an exclusivity agreement (www.practicallaw.com/4-107-6577), where such an agreement is permitted (note that exclusivity agreements between a bidder and target on public mergers and acquisitions which are subject to the Takeover Code (www.practicallaw.com/0-107-7362) are generally prohibited under Rule 21.2 of the Takeover Code).

Heads of terms are commonly entered into at the beginning of a transaction, once preliminary terms have been agreed and before commencement of detailed due diligence (www.practicallaw.com/5-107-6162) and the drafting of definitive agreements (which is where the parties will begin to incur significant costs). The parties may enter into a series of heads of terms throughout the negotiations, particularly when negotiations are prolonged.

For further details, see Practice note, Heads of terms in commercial transactions (www.practicallaw.com/6-383-2652).

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