Term Sheets and their Role in Mergers and Acquisitions

Introduction

Mergers and Acquisitions or amalgamations, though nowhere defined under the Companies Act 2013, refer to the process of combinations between two or more different companies wherein one company either absorbs the other company taking over the control of its assets, liabilities and business of the other entity or both the entities combine and collaborate in order to conduct their business operations together.

“Term Sheets”, even though not statutorily incorporated or mandated under the Companies Act, 2013; are an essential step in such process which enables both the entities intending to join their resources to carry out the process with efficiency and effectiveness.

Term Sheets – Understanding the Role

Also known as “Letter of Intent” or “Memorandum of Understanding”, the term sheet is an essential step in the process of efficient setting up of business deals under Mergers and Amalgamations. Even though the sheets are usually non – binding in nature, they act as a guiding light for providing a roadmap for the process of negotiations, due diligence and documentation and ensuring that the efforts and resources of both the parties are utilised efficiently in the transaction.

There are various essential elements that should be incorporated into a term sheet which include the following:

• Decision and documentation as to which clauses of the sheet are binding in nature and which are not.
• Identifying the structure of the deal pertaining to what is the subject matter of the transaction i.e., what has been sold and bought during the process, the market valuation of the company, the capital structure of the company and other financial details.
• Structure of the price and payment valuation which shall include pertinent details such as whether the deal will take place in cash/credit or other methods, stock – swap or an amalgamation of both methods. Secondly, various allied details such as purchase price adjustment, earn – out provisions and escrow/hold back demands of the buyers should also be included in the sheet. Lastly, the taxation details including deductions, gross – ups or returns pertaining to direct as well as indirect taxation need to be included.
• Incorporation of the scope for due – diligence in event of further transactions along with other specific conditions before and after the transaction.
• Addition of exclusivity/privity clause wherein one party i.e., buyer shall ensure that the seller signs an agreement wherein the seller or the target company is restricted from seeking out any future or potential buyers during the period of negotiations. This provision is much needed in order to ensure that the buyer receives a fair chance for completing its processes and research including but not limited to due diligence, compliances and other details for completion of the deal. The duration of this period is flexible and may usually range from 90 to 120 days.
• Identifying the timelines and deal documents that are intended to be drawn and furnished by both the parties in order to complete the processes of due – diligence, execution of documents and closing the transaction. Even though the majority of term sheet is non – binding in nature, this clause is also needed in order to specify the clauses which may bind the parties and which would not.
• In the event that any of the two parties i.e., the seller or the target company backs out or redacts from the process without following the norms laid down in the term sheet without any valid justification or reasons, the Term Sheet should contain a mandatory provision for ‘Break Fee’ which shall specify amount of monetary compensation/damages payable by the defaulting party to the other party for loss caused for investing their time, resources and efforts in various negotiation processes.
• One of the most vital clause which must be also be incorporated and be binding upon both the parties is the confidentiality clause which prohibits and restricts either of the two parties from disclosing the confidential information uncovered after conducting due – diligence or shared in confidence by the parties with each other since publication of any such information may have a detrimental impact upon the business operations of the other party.
• Lastly, the dispute resolution clause which shall prescribe the manner in which the disputes, if any arising between the parties during the process of mergers or acquisition or post the closure of the deal must also be incorporated in the term sheet in order to resolve any dispute arising between the parties in a structured manner without worrying about the process through which the parties can arrive at a settlement.

The above- mentioned provisions, even though are not mandatory act as guidelines for effective drafting of term – sheets. Additional clauses may include governing law clause, place of meetings and those provisions which may be binding upon the parties.

Conclusion

The importance of a term sheet in the process of mergers and amalgamations should not be undermined as they provide a synchronised structure to the deal along with ensuring that both the parties to the transaction are on the same page while undergoing the processes. Additionally, a well – drafted term sheet also enables the parties to proceed with the transaction by avoiding any disputes and finishing the processes within a stipulated time limit which shall also enable them to resume their primary business activities in an efficient and effective manner.