Heads of terms—share and asset purchases
Heads of terms—share and asset purchases

The following Corporate guidance note provides comprehensive and up to date legal information covering:

  • Heads of terms—share and asset purchases
  • Advantages and disadvantages of using heads of terms
  • Legal issues to consider in preparing heads of terms
  • Checklist of provisions to include in the heads of terms

Heads of terms (also known as an offer letter, term sheet, letter of intent or memorandum of understanding) set out, in a short document, a broad outline of the parties' expectations, understanding and agreement of the key terms of the proposed transaction which they have agreed in principle. Where used, heads will be signed at the beginning of the transaction as soon as the parties agree key terms and before the buyer incurs costs in conducting its due diligence and negotiating the transaction documents. Whilst the heads will not compel the parties to conclude the transaction on the stated terms, or even at all, they are intended to establish, in principle, the main commercial terms of a deal.

There is no standard format for heads of terms and they can either take the form of a letter (as is common) or an agreement. Either party can prepare the heads of terms, although it is common for the buyer to prepare the first draft. First drafts are often prepared by the principals and then reviewed and amended by the lawyers involved, if brought into the transaction early enough.

See Precedent: Heads of terms—private M&A—share purchase and Precedent: Heads of terms—asset purchase. These set out the heads of terms in a letter format.

Where the subject matter of a transaction is straightforward, the parties may simply