Heads of Terms
A preliminary document outlining the key terms of a proposed transaction before detailed legal agreements are drafted.
Full Definition
Heads of Terms (HoTs), also called a Letter of Intent (LOI) or Term Sheet, is a preliminary document setting out the principal terms on which parties propose to transact.
Typical contents:
- Purchase price and payment structure
- Assets/shares being acquired
- Key conditions precedent
- Exclusivity period
- Timetable to completion
- Due diligence arrangements
- Confidentiality provisions
- Costs allocation
- Governing law and jurisdiction
Binding vs non-binding: Most provisions are expressly non-binding ("subject to contract"):
- Purchase price
- Transaction structure
- Conditions
Certain provisions are typically binding:
- Confidentiality
- Exclusivity/lock-out
- Costs
- Governing law
Purpose of Heads of Terms:
- Confirms mutual understanding of key terms
- Authorises expenditure on advisers
- Sets framework for negotiation
- Creates moral (if not legal) commitment
- Triggers exclusivity period
UK practice: HoTs are common in UK transactions but their legal effect is limited. Courts will not enforce agreements to agree, so detailed terms must be finalised in definitive agreements.
Related Terms
Exclusivity
An agreement where the seller commits not to negotiate with other potential buyers for a specified period.
Letter of Intent (LOI)
A document expressing serious interest in acquiring a business and outlining proposed transaction terms.
Share Purchase Agreement (SPA)
The definitive legal contract governing the sale and purchase of shares in a company.
Conditions Precedent
Specific requirements that must be satisfied before a transaction can complete.