A party wants to acquire the assets owned by another party. The other party is willing to sell its assets. It should be a straight forward offer and acceptance, right?

Unfortunately, not in this case. The potential seller wants to sell the shares of the company which owns the assets and not just the assets only. The potential buyer doesn’t know what other liabilities which the company that owns the assets has. One of the parties prepared a draft SPA but after months, the parties are still nowhere near to agreeing on the structure of the transaction.

In such instance, when parties have not agreed in principle on the transaction structure or key terms, it is beneficial to use a term sheet for negotiation and to set out the key terms, instead of going straight into the SPA. A term sheet allows the parties to identify “deal-breakers” at the outset of negotiation.

The following are some key terms to include in a term sheet:

1. Subject matter
Set out whether the transaction is a sale and purchase of shares or assets.

2. Parties
Who are the seller and purchaser?

3. Consideration
(a) the amount of consideration;
(b) the mode of satisfaction of the consideration, i.e. whether payment is by way of cash, issuance of shares or some other mode;
(c) whether any deposit is payable;
(d) whether the consideration is payable one or more tranches;
(e) whether there is any retention sum, i.e. part of the consideration is being retained post completion of the transaction and the payment is subject to certain conditions being met;
(f) the time of payment of the consideration;
(g) whether the consideration is a fixed sum or subject to adjustment.

4. Definitive agreements
What are the definitive agreements to be entered into between the parties? Typically, the definitive agreements include the sale and purchase agreement, shareholders’ agreement (if the sale and purchase of shares is not for the entire equity stake) and service agreement with the key management of the target.

5. Timing for completion
This sets out the time period for parties to complete the transaction.

6. Exclusivity
This refers to the exclusivity period during which the seller undertakes with the purchaser that the seller will not enter into negotiation with any other party for the sale of the assets or shares and the purchaser has the exclusive right to negotiate with the seller.

7. Terms specific to the transaction
For example, in a sale and purchase of shares, does the target company have any liabilities which should be settled prior to completion? If yes, how will the liabilities be settled?
Will there be any profit guarantee given by the seller?

8. Non exhaustive
The term sheet is not intended to constitute an exhaustive terms and conditions of the transaction.

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This post was first posted on Linkedin on 2 August 2021.