Negotiating Heads of Terms (LOI/MOU) & Related Issues

£625.00 +VAT

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This course can also be presented face to face in-house or via live in-house webinar.

Heads of Terms, Exclusivity and NDAs

Heads of Terms Course Objectives:

Participants will:

  • Have an understanding of tactical matters in heads of terms and other documents
  • Learn about the key legal issues to consider – are the clauses legally binding?
  • Get to grips with parties, deal structure, price & consideration including relevant mechanisms, e.g. locked box
  • Explore the main conditions – financing, commercial, due diligence and MAC clauses
  • Gain an understanding of the methods of limiting liability including representations, warranties, disclosure & indemnities
  • Gain an appreciation of the confidentiality letter / NDAs, including their real purpose
  • Learn about the relevance of exclusivity, including its pros and cons
  • Master the purpose, contents and relevance of engagement letters

Heads of Terms Course Content:

Part 1: Heads of Terms (“Heads”) 

Tactical matters

  • What’s in a name & does it matter – Heads, Term sheet, LOI, MOU etc.
  • Rationale & Purpose
    • Are they always necessary?
    • 7 key advantages of using Heads
    • 4 disadvantages and how to mitigate them
  • Format of Heads
    • Detailed vs short
    • Who prepares them

Key legal issues to consider

  • Legally binding or not (q.v. RTS Flexible Systems case)
    • Clauses which should not be legally binding
    • Clauses which should be legally binding
    • Position in Europe / Civil law
    • Position in the UK
    • Impact of “Subject to Contract” (q.v. Global Asset case)
  • Regulatory matters – Financial Promotion? (§21, Financial Services and Markets Act 2000)
  • The Duty to negotiate in Good Faith
    • UK vs Europe/ Civil law
    • Traps for the unwary
  • Agreements to Agree

Parties, deal structure, price & consideration

  • The Parties (and any guarantors)
  • Description of the proposed transaction
    • Deal structure
    • Full title full title guarantee’ and ‘limited title guarantee’
  • Details of the Purchase Price
    • Fixed price, a range or to be determined
    • Basis/Assumptions on which the price is based (why this matters)
    • Valuation assumptions
    • The purchase price mechanism – Locked Box v Completion Accounts
  • Three critical issues which need to be addressed in the Heads (& not left to the SPA)
    • Which set of “Accounts” are used – why and how this matters
    • Earn-outs – defining the benchmark & how to mitigate problems
    • Specific issues with the Equity Bridge
  • Nature and timing of the Consideration
    • When the consideration will be paid
    • Nature of the consideration e.g. cash shares loans etc.

The Main Conditions

  • How and why this matters to the buyer
  • Required approvals – clarity is key
  • Due diligence
    • Arrangements & requirements
    • Access to key staff
    • Data rooms
  • Completing a definitive, legally binding SPA
    • Who prepares this & why that matters
  • Material Adverse Change
    • Scope
  • Commercial matters, Legal & Regulatory proceedings
    • Commercial contracts & licenses / CoC
    • Completion issues
  •  Financing
    • Terms of financing inter-relation with the financing documents
  • Pre-completion restructuring
  • Timing – Milestones & long-stop dates

Limiting Liability – Representations, Warranties, Disclosure & Indemnities

  • Liability for pre-contractual statements
  • Dealing with the Warranties
    • General or Specific approach to warranties
    • Scope
    • Tactical matters for the parties
  • Warranty insurance
  • Due diligence – a risk matrix
  • Interaction with Warranties and Disclosure
  • Key areas of DD
    • Lawyers
    • Accountants / tax
    • Commercial DD
    • Insurance
    • Environmental

Miscellaneous

  • Transaction documents
    • Migrating the Heads to the SPA
    • Interaction with other key documents
    • Non-compete – Issues re employees and customers
  • Costs & Break Fees
    • Triggers for break fees
    • Potential problems with Break fees
    • Legal issues – Is it a penalty?
    • Fiduciary duties
    • Financial assistance
  • Other agreements
  • Rights of third parties
  • Governing law and jurisdiction

Confidentiality letter / NDAs Real purpose of NDAs

  • Seller’s perspective
  • Buyer issues
  • Long vs Short form
  • “Confidential Information” defined
    • Form, Source, Method
  • Dealing with Extremely sensitive information
  • “Residual” clause
  • “Authorised Persons” defined
    • Seller and buyer issues
  • The 9 Key Undertakings by the Buyer
  • When the deal fails – “Return or Destroy
    • Potential problem areas for the buyer
  • Enforced Disclosure
  • Other ancillary terms
    • No offer, representation, warranty or license
    • Non-solicitation of staff, customers, suppliers
    • Non-disclosure of discussions
    • Enforcement and remedies
  • Practical steps for the Seller

Exclusivity

  • Rationale
  • Format – separate document or in the Heads
  • Lock outs vs Lock ins (are latter enforceable)
    • Duration – Potential problems “”reasonable period”
  • Pros and cons
    • Seller’s view
    • Buyers view
  • Main clauses
    • Conduct during the Exclusivity Period
    • Approaches by 3rd parties
    • Access during the Exclusivity period
    • Relief and Remedies
    • Announcements
    • Termination & Waivers
    • Costs
    • Status of the Exclusivity
  • Issues in re fiduciary duties

Appendices (covered time permitting – materials in Appendix)

Engagement letters

  • Defining the deal
  • Role & scope
  • Remuneration & expenses
    • Contentious issues – Abort and Tailgunner fees
  • Duration and Termination
  • Liability and Limiting liability
  • Hold Harmless letters

Background of the Trainer:

The trainer is a consultant, public speaker and author. He provides training programmes globally to a blue-chip client base on private equity, debt finance, loan documentation and restructuring. He is a senior consultant with Debt Xplained, with Grant Thornton UK (Debt Advisory) and is also a Senior Advisor to KPMG Finland. He has spoken at conferences in the UK, Europe, and Australasia & South Africa. He provides training to a wide range of clients on a bespoke in-house basis & publicly through Redcliffe Training Associates. Additionally, he is the Programme Director for the infrastructure / project finance module for the MBA programme at the Cass Business School in London.

Heads of Terms Course Summary:

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 Heads of Terms Course 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 Heads of Terms Course 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.

 

What Redcliffe’s clients are saying about the course:
“Presenter knew the subject and gave lots of real life examples.”

   Counsel, Farrer & Co

Farrer

 

“Very concise and to the point. Covered all of the key areas in just the right amount of details.”

Director, Baker Tilly

“Covered lots of topics relevant to the early stages of M&A transaction.”

                                                                   –Senior Associate, Watson Farley & Williams

Image result for watson farley

 

“Great experience and personal stories to highlight the key issues. Good overall pace of delivery and level of engagement.”

  Associate, Equiteq

Equiteq - Growing and realizing equity value in consulting firms

 

 

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12 October 2018, 12 March 2019, 24 September 2019