Buying or selling an interest in a company is exciting for both the buyer and the seller. This is usually preceded by an intensive process with different phases:

  1. an exploratory phase;
  2. a Non-Disclosure Agreement / Non-Disclosure Agreement (“NDA”);
  3. a term sheet vs. letter of intent / Letter of Intent (“LOI”); and
  4. a purchase agreement.

The orientation phase

This phase generally starts with discussions, during which the parties explore the price and conditions. Although the parties are still only exploring options in the initial phase, we recommend that the parties should conclude a non-disclosure agreement as soon as possible.

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A non-disclosure agreement and penalty clause

The seller will have to provide commercially -sensitive information to a potential buyer at an early stage. They will then decide whether to make an offer based on that information. A nondisclosure agreement provides, among other things:

  • the extent of the duty of confidentiality;
  • the possible transfer of the obligation to third parties (under certain circumstances); and
  • a penalty clause for violation of the confidentiality obligation.

Of course, the intention of the non-disclosure agreement is that both parties should abide by it. However, there are times when confidential information is leaked or made public. To prevent this, it is customary to include a penalty clause in the NDA.

After all, without a penalty clause, the document is an ineffective instrument. In order for the penalty clause not to block the possibility of compensation, we recommend the inclusion of a separate clause for this.

With regard to the pre-contractual phase, the Supreme Court has prioritised freedom of contract. Each of the negotiating parties is in principle free to break off the negotiations, unless this would be unacceptable on the basis of the other party’s justified confidence in the conclusion of an agreement (or in connection with other circumstances). This exception is applied with restraint in case law.

After signing the confidentiality agreement, each of the parties is in principle free to terminate the negotiations. This will only change as the parties go into further detail about the terms of the deal.

In such cases, the party who breaks off negotiations may be forced by the courts to continue to negotiate or to compensate the other party for damages.

Term sheet vs. letter of intent

If the parties have exchanged enough information to reach a deal, they will establish their intention to enter into the deal in a letter of intent or LOI. The letter of intent or LOI forms the basis for further negotiations and includes:

  • the method of acquisition (equity transaction or a transaction of assets-liabilities);
  • the price or pricing mechanisms for the acquisition (the purchase price);
  • a timeline for the acquisition and a target closing date;
  • extent of confidentiality;
  • (non-)exclusivity;
  • when and how negotiations can be broken off and the consequences of doing so;
  • cost allocation; and
  • choice of law and forum.

It sometimes happens that a term sheet takes the place of an LOI. The LOI looks more like a contract, whereas a term sheet contains a point-by-point summary of agreements. Both documents are regarded as a ‘preliminary agreement’.

A preliminary agreement is in itself a (binding) agreement in which the parties prepare the conclusion of the agreement that they ultimately had in mind (i.e. the main agreement). In that sense, the term sheet and the LOI, depending on the content of those documents, can be regarded as auxiliary agreements.

The title of the document is irrelevant for the parties’ commitment to the content of an LOI or a term sheet. The title could suggest that the agreements made therein are non-binding for the parties. That is not necessarily the case.

The wording chosen in the document is decisive for the possible binding of the parties to the contents of the LOI or the term sheet. If the document in question does not contain an escape clause or conditions for concluding the purchase agreement, and if all points relevant to the deal are included, a party that changes its mind may end up being deceived

A purchase agreement

The agreement between the buyer and seller must be put into a purchase agreement. Depending on the type of acquisition, the details are set out in an asset-liability purchase agreement (the Asset Purchase Agreement or ““APA”) or in a share purchase agreement (the Share Purchase Agreement or “SPA”).

The content of the APA or SPA is usually extensively negotiated by the parties and their lawyers, with several draft versions being sent back and forth before a final version is signed.

Negotiations about the contents of the purchase agreement sometimes start earlier in the sales process. This happens when the parties have agreed to a specific time frame in the LOI or term sheet, for example.

Signing the SPA is called the signing. The share transfer does not therefore happen immediately. This is done via the notary and can happen later. The execution of the notarial deed is called closing.

Contact us

Investor – and especially seller – beware! The name of a document does not necessarily determine whether the parties are bound by its contents. For more information on the law of obligations, please contact corporate lawyer Dirk de Waard on


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