The Heads of Agreement (“Heads”) are perhaps even more important than the SPA since, if they are poorly drafted, they can fail to clarify the essential aspects of the deal adequately they can either delay its completion (or even scupper the transaction) whilst the parties revisit the original terms. Secondly, they can inadvertently create a binding obligation to conclude the deal on unfavourable terms if they omit suitable CPs; for example, not making the deal conditional on adequate due diligence or available financing or being unable to adjust the purchase price later when the assumptions on which the initial price was based, differ post due diligence and finally they could expose the parties to potential liability even if the deal does not proceed (e.g. the duty to negotiate in good faith).
Negotiating some cases, (e.g. dealing with unsophisticated sellers) failure to address contentious issues in the heads can mean the transaction doesn't complete or takes much longer. The three areas which create the most friction are; First, which Accounts (and accounting policies) have been used by the seller as the basis for valuation (private owners rarely use IFRS/GAAP); secondly, what qualifies as debt (or cash) in the equity bridge and finally, if an earn-out is to be used, what-if scenarios must be considered to avoid disappointment and disputes later.
Whiles the Heads are vital, they often dovetail with other key aspects in the deal particularly the Confidentiality (the “NDA”) and the Exclusivity. Whilst these aspects are often included in separate documents they may also appear in the Heads themselves. They play important role in the deal in differing ways.
The NDA is often the first point of friction between the parties and thus sets the tone for the negotiations that follow. Its rationale is often misunderstood by many practitioners; whilst it is true that confidentiality is critical in deals with proprietorial IP, they offer other benefits to sellers and even the ultimate buyer too. Getting the terms of the Engagement letter right also matters; not only does it set the scope and fees for work but, as numerous clients have found out to their cost, Tailgunner fees can have a nasty sting in the tail (e.g. the Recap and Grandtop cases).
The programme also reviews other critical documents and elements of the M&A process which precede the SPA but which are inextricably linked with the final SPA. For example, Due diligence is inextricably linked with the warranties, disclosure and indemnities but it is vital to strike a balance which enable buyers to make an informed view on the target whilst protecting key commercial information on the target if the deal does not proceed. In this context, the data room (and data room rules) play an important part in this but also giving the seller insight into the buyer’s thinking.
The programme is aimed at those involved in M&A transactions and is designed to focus on the key legal and commercial issues of the deal. It will appeal to lawyers, corporate finance advisors, bankers and principals in the UK and Europe.
Appendices (covered time permitting – materials in Appendix)
All courses we provide are part of a bigger group of courses for larger understanding of the corporate finance sector.
Corporate Finance Course
Training Course Area
|The Advanced Negotiation Issues in Financial Covenants Course||Annual Debt Service Coverage ratio, European Central Bank, High yield bonds|
|Valuing Commodity Companies and Sectors||Macro-economic factors, Normalised earnings multiples, valuing a natural resource firm|
|Advanced Negotiation Issues in M&A||Buy-side policies, completion accounts|
|Advanced Takeover Code||Buying share stakes in target, Schemes of Arrangement, target strategies and tactics, UK Takeover framework|
|Valuing a Pharmaceutical Company Training Course||Conventional modelling techniques, dividend based model, pharma valuation|