“Bloody Difficult” – Heads of Terms in corporate transactions

Theresa May’s now infamous view that being ‘bloody difficult’ is the best way to get a good deal, may today sound a little hollow, and it is not an approach that is to be recommended when trying to secure a business deal.

When it comes to business negotiations, it is usually helpful for both sides to have a clear idea of each other’s expectations at the outset.  Setting certain parameters at an early stage can help the parties to identify which points are deal-breakers and where there might be a need for further negotiation.

In corporate transactions, Heads of Terms can help to achieve that aim.  They allow the parties to draw a ‘line in the sand’ – usually by setting out the most important features of the proposed deal, including the structure of the transaction and, crucially, the price.

Well-drafted Heads of Terms won’t legally oblige the parties to go ahead with the deal but they do serve as a marker of serious intent and a reference point for negotiations.

So, why else is it a good idea to use Heads of Terms?  If the parties have already discussed the main points of the deal, why not just press on with negotiating the purchase agreement?

Heads of Terms are often the first ‘formal’ document agreed between the parties to a substantial transaction and will be most effective if they are drafted carefully drawing out the main terms of the deal.  This means they can help to sharpen the parties’ focus on any specific areas of concern.  If the transaction is complex, drawing up and negotiating Heads of Terms can root out areas of misunderstanding or disagreement.  If those prove insurmountable, identifying this at the outset can save a great deal of time and money for all concerned.

For instance, we recently acted for a client who was proposing to purchase a percentage of the shares in the target company.  It was only by discussing the draft Heads of Terms, that the client came to understand that he would not be receiving the level of control over the company he was looking for.  As a result, he decided not to proceed, thereby avoiding a bad deal.

Be careful however – because Heads of Terms are usually signed before the buyer has carried out detailed due diligence, the buyer should make sure to include specific “reservations” in the Heads of Terms to cover this fact and afford protection if the due diligence later reveals something unexpected.

If you are looking to buy or sell a company, or a business, please contact Tim Lucas for assistance and advice: timothylucas@boltburdon.co.uk or 020 7288 4753.

You can also contact one of our other solicitors in the Corporate and Commercial team here.