Parties in M&A transactions may sometimes enter into heads of agreement to set out the key terms and conditions on how they intend the transactions to proceed, prior to the negotiation and execution of sale and purchase agreements.

The buyer should request the heads of agreement to include an exclusivity clause.  Under such clause, the seller agrees to negotiate solely with the buyer, and not to enter into any negotiation or transaction with any other party to dispose the target company or assets, for an agreed period of time. This allows the buyer time to carry out due diligence and to negotiate the terms of the transaction without having to worry that the seller is using the buyer to get offers from other parties.

From the seller’s perspective, the seller would want the exclusivity period to be as short as possible or not longer than necessary for the buyer to conduct the required due diligence. This is to encourage the buyer to proceed with the transaction as soon as possible.

After the exclusivity period expires, the seller may enter into discussion with other parties, even if the negotiation with the original buyer is still ongoing, unless the exclusivity period is extended.

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This post was first posted on Linkedin on 7 February 2021.