Introduction
On 21 September 2023 I wrote an article titled “Term sheets in commercial transactions”. It was an introductory article in which I explained what a term sheet is. I also summarised the key contents in terms sheets for loans, investments, venture capital finance, mergers and acquisitions and joint ventures. In this article I take a closer look at term sheets for mergers and acquisitions.
For convenience I recap what a term sheet is. It is essentially a brief document that outlines the material or key terms and conditions of a potential commercial agreement that parties wish to enter into. It can be binding or non-binding. Parties may use the term sheet for further negotiations. When the parties to the potential business agreement sign the term sheet it is said to be “executed”. The term sheet is then used by commercial lawyers representing the parties to draft a detailed binding legal document such as an agreement or contract.
Term sheets for mergers or acquisitions
A merger is when two or more entities or companies combine to form one bigger one. This may be achieved by making the shareholders in the merging entities shareholders in the merged company. For example, Company A and Company B can combine and merge into a new Company C. Shareholders in A and B will then become shareholders in the bigger company C.
On the other hand, one company may acquire or buy another which is usually smaller. The smaller target company becomes a subsidiary of the bigger acquiring company.
The key terms and conditions included in a term sheet for mergers or acquisitions may include the following:
Parties to the transaction
Quite simple but very important. It is essentially that the parties to the transaction are clearly mentioned.
Purchase price
This is how much will be paid for the transaction. In the case of an acquisition, it is how much the acquiring company will pay the existing shareholders to acquire shares in the target company. In the case of a merger the merging companies usually have values attached to them and how many shares each will get in the new merged company. So, one way or the other there has to be valuation of the businesses or of the shares in the companies. Disagreements over valuation or purchase price is usually a deal breaker.
Payment terms
The purchase price can be paid in the form of cash, debt or other shares. There can be share swap as settlement of the purchase price. The term sheet has to be very clear on how settlement will done as this can be a deal breaker.
Key conditions
Key conditions affecting the transaction may include the following:
- Proof of funds
- Due diligence on the target company or merging entities.
- Board approval
- Shareholder approval
- Regulatory approval such as the Competition and Tariff Commission, Zimbabwe Investments Development Authority, relevant Ministry, Reserve of Zimbabwe Exchange Control if required.
Voting rights of securities
Since mergers and acquisitions involve securities, such as shares the term sheet normally includes voting and other rights associated with the shares. Some of the rights may include conversion rights, redemption, transfer, etc.
Working capital
Some term sheets may include a working capital provision whereby an investor such as the acquiring party agrees to fund the acquired company’s working capital requirements for example through debt or other structures.
Governance structure
The term sheet may also include governance structures and systems such as the appointment of directors and senior management.
Expense clause
This sets out the expenses associated with the transaction and who is responsible for paying them.
Warranties and representations
These are warranties, guarantees, undertakings or representations by the parties to give comfort or assurance to each other.
Validity and termination
It is normal to specify the validity period of the term sheet and its termination.
Key definitions
Some term sheets in complex transactions may include definitions for clarity.
Acceptance clause
The sets out the period within which to accept or reject the offer and provides space for the signatures.
Conclusion
Term sheets are important documents in deal structuring or business agreements including mergers and acquisitions. They give a summary of the key terms and conditions to be included in binding legal documents such as agreements.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, registered tax accountant and advises on deal and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He writes in his personal capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com
