Mergers and Acquisitions: Advantages and Disadvantages of using Heads of Terms

Posted on by J.W. O'Donovan

In our last blog in this series, we highlighted the key elements of a Heads of Terms including the provisions covered and whether it is legally binding. In this article, we will review the advantages and disadvantages of using Heads of Terms.

Some of the advantages of using Heads of Terms are:

Recording of milestones

Getting to the point of an agreed Heads of Terms can be a major milestone on what might or might not have been a long road of negotiation and discussions between the parties, and can be useful to effectively move onto the next phase.

Binding commitments

If the Heads of Terms are partially binding, parties can introduce binding commitments at an early stage in the transaction e.g. provisions relating to confidentiality (if there is no separate confidentiality agreement), exclusivity or lock-out undertakings and the treatment of costs.

Setting out of key commercial terms

A Heads of Terms can be useful for setting out parties’ understanding, particularly on complex issues such as pricing models and can help focus the negotiations and highlight major issues at an early stage.

Some of the disadvantages of a Heads of Terms are:

Unintentionally binding

If not properly drafted what one party might have considered to be non-binding may end up being used against them as a binding term.  If the parties do not want the Heads of Terms to be binding, this should be expressly stated.

Time and resources

The time taken to negotiate Heads of Terms can be disproportionate to the benefit. If the parties intend to sign a full contract in due course, consider whether the parties have sufficient time and resources to negotiate the Heads of Terms and if so, whether they are prepared to dedicate those resources to work on the Heads of Terms.

Expiry of Heads of Terms and contractual vacuum

If Heads of Terms are binding, there should be clear provisions about what happens when they expire. Failure to agree this will leave a contractual vacuum and cause uncertainty over whether there is a contract in place and, if so, on what terms.

Conclusion

Where parties prepare Heads of Terms in an inappropriate manner, and without legal advice, the document prepared has the potential to cause more harm than good.  Any ambiguity can cause uncertainty over the exact nature of the relationship between the parties. There can be doubts over whether or not the parties had intended to be legally bound by the whole document or by particular terms within the document.  Most uncertainties can be eliminated or at least reduced by clear drafting.

If you would like more information on this topic or any other of the topics in our series on Mergers and Acquisitions, contact:

 

The roles of parties involved in Mediation

Posted on by J.W. O'Donovan

In our third and final article on the topic, we will look at the roles of some of the parties involved in the Mediation process. For previous articles in the series, click here for our overview on the advantages of Mediation and here for more on why the Mediation Act is welcome.

Role of Mediator  

Section 8 of the Mediation Act 2017 places the following obligations on the Mediator during the Mediation process:

  • Declare any conflict of interest which they become aware of during the course of the Mediation and, unless the parties agree otherwise, cease to act in such circumstances
  • Act with impartiality and integrity and treat the parties fairly
  • Complete the Mediation as expeditiously as is practicable, having regard to the nature of the dispute
  • Ensure that the parties are aware of their rights to obtain advise (including legal advise) prior to signing any Mediation Settlement
  • The Mediator shall not make proposal to the parties to resolve the Dispute as Mediation should be determined by the agreement of the parties, unless otherwise requested

Role of the Court

Part 4 of the Act deals with the role of the Court in Mediation. Section 16 provides that a Court may on the application of a party or on its own motion invite the parties to consider Mediation and provide the parties with information about the benefits of Mediation to settle their dispute.

Following an invitation by the court where the parties to decide to engage in Mediation, the Court may:

  • Adjourn the proceedings
  • Make an Order extending time for compliance by a party with Rules of Court or with any Court Order; or;
  • Make such other Order or direction, as is necessary to facilitate the effective use of Mediation

Section 17 goes on to say that following an invitation by the Court under Section 16(1), the parties to the proceeding do engage in Mediation and, afterwards, then apply to the Court to re-enter the proceedings, the Mediator is obliged to submit a written report to Court setting out:

  • If the Mediation did not take place, the reasons why it did not occur or;
  • Where the Mediation did take place, a statement as to whether or not a settlement has been reached and if so, a statement of terms of this settlement. A copy of this report must be provided to each party at least seven days prior to its submission by the Mediation to the Court.

Whilst the mandatory nature of these provisions may be considered to conflict with the confidential and voluntary nature of Mediation, such reports will likely be drafted in such a manner as not to disclose any confidential material. The Law Reform Commission had recommended that any such report should be limited to a neutral summary of the outcome.

Under Section 21 of the Act, a Court may now have regard to any unreasonable refusal or failure by a party to consider or attend mediation. This means that any party who refuses to mediate are at risk of having to discharge the costs incurred by the other side.

This would appear contradictory, given the voluntary nature of mediation and that parties should not be forced into mediation where they are unwilling to do so. It remains to be seen how the Courts will interpret this part of the Act, particularly in disputes involving debts due and owing. There is also no provision for a party or indeed the Mediator to advise the Court of a party merely attending as a box ticking exercise.

Bullying and harassment claims are now heard since 2018, in the Personal Injuries list in Dublin (as opposed to the non-jury list). The relevant Practice Direction says nothing about Mediation.

However, the Legal Diary now in addition states as follows;

“HC76 NOTICE With effect from Trinity Term 2018 the following arrangements will apply to Personal Injuries Actions arising from allegations of bullying and or harassment. Upon application for a trial date before either the Deputy Master or the Judge in charge the case must be identified as one arising from such allegations. No case shall be listed for trial unless and until the parties have been to Mediation save for good reason.”

This does not confirm who should pay the Mediator’s fee (and what happens if one party cannot do so) except that now the Court will not list it for trial “unless and until the parties have been to Mediation save for good reason”. Again, this direction appears to go against the voluntary nature of Mediation.

Role of the Mediation Council

Section 12 provides for the potential establishment of a Mediation Council to oversee the development of the Mediation sector. The intention appears to be that the Council would represent the interest of the Mediators and the public interest, and the Minster may declare such body to be the “Mediation Council of Ireland”. This body must be sufficiently representative of the Mediation interests and also meet minimum requirements provided for in the Schedule of the Act. Such a Council would likely become the regulation for the Mediation sector; however, it remains to be seen whether such a Council will be established and how it will be funded.

For more information on the Mediation process, contact: 

Ciara Lehane, Solicitor
clehane@jwod.ie

 

 

Mergers and Acquisitions: Heads of Terms

Posted on by J.W. O'Donovan

The third in our series on the practical aspects of running a successful mergers and acquisitions transaction, this article looks to highlight the key elements of a Heads of Terms. Please see our news section here for other publications in the series.

  1. What is a Heads of Terms?

When entered into, in the context of a share sale and purchase, a Heads of Terms (which can also be referred to as a Letter of Intent, Memoranda of Understanding or Term Sheet), is entered into relatively early in the transaction for the purpose of the parties recording:

a) The main terms of a preliminary non-binding understanding, intended to lead to a binding contract or series of contracts for an entire project or transaction.

b) An agreement to set out the key terms of a transaction, which contains some binding terms and some non-binding.

c) The terms of a preliminary binding agreement, again intended to deal with certain preliminary matters prior to the signing of a contract to cover the whole project or transaction.

2. Is it legally binding or not?

Above we mention the fact that a Heads of Terms can be non-binding, partly binding or entirely binding with additional terms. The answer to the question therefore invariably depends on what the parties have agreed to at the outset but in the majority of cases we would find that a heads of terms contains only some provisions which are agreed to be binding by both parties. That brings us to the next question.

  1. What provisions are covered in a Heads of Terms?

A standard heads of terms will generally contain provisions including but not limited to:

a) Commercial Terms

This will set out the overall agreement between the parties. For example Investaco Limited intends to acquire 50% of SellCo Limited for a price of €10m subject to completion of financial, legal and commercial due diligence.

b) Time Limits

A deadline for completion of the transaction and execution of a binding Share Sale and Purchase Agreement would generally be included, as well as confirmation of the timelines relating to completion of due diligence.

c) Pre-Conditions

It might be necessary to set out any pre-conditions to completion such as the approval of the Competition and Consumer Protection Commission, consent of existing customers or secured creditors, or even the conclusion of a commercial agreement by the target company with a new customer without which the deal may not be commercially viable for the purchasing company.

d) Confidentiality

Where a separate Non-Disclosure or Confidentiality Agreement has not been entered into then it is usual for the Heads of Terms to contain a binding confidentiality clause with mutual restrictions on both parties, as in most cases confidential information is likely to be exchanged by both parties.

e) Exclusivity

This is usually a binding provision in the Heads of Terms as the Purchaser will want to ensure that the seller is not at the same time using their bid to attract another buyer at a higher price, potentially wasting the buyers time and resources.  The exclusivity clause would generally be limited to a specified time period so as to ensure the buyer has an incentive to complete their due diligence in as an efficient manner as possible.

f) Transaction Advisor Details

Details of the advisors appointed by each party including financial and legal.

g) Costs

A provision setting out that each party will be liable for its own costs, or where the parties agree that one party would be responsible for the costs of a portion of or all of the other parties costs in particular circumstances.

h) Jurisdiction and Governing Law

This is not an exhaustive list and every heads of terms will be different in its form and content.

Conclusion

This is a just a flavour of the content of a Heads of Terms which can be as simple or as complex as the parties require. As stated above it is generally the pre-cursor to a more complex and biding agreement to follow with care required to ensure that the parties don’t commit to a binding agreement where this was not intended.

In the next article, we will look at the advantages of using heads of terms.

If you would like more information on this topic or any other of the topics in our series on Mergers and Acquisitions, contact: