Legal advice on Dutch M&A, private equity and venture capital term sheets
A term sheet sets out the key commercial and legal terms of a proposed transaction. It is commonly used in acquisitions, venture capital rounds, private equity transactions, management participations, joint ventures and strategic partnerships.
For foreign investors, buyers and founders entering into Dutch transactions, the term sheet is often the first document that defines the deal architecture. It may later form the basis for the definitive transaction documentation, such as a share purchase agreement, asset purchase agreement, investment agreement or shareholders’agreement.
A term sheet should therefore not be treated as a purely informal document. Under Dutch law, the title of the document is not decisive. The wording, the level of detail, the parties’ intentions and their conduct during negotiations may determine whether certain provisions are binding.
Dirk de Waard advises on the drafting, review and negotiation of term sheets in Dutch M&A, private equity, venture capital and joint venture transactions.
Binding or non-binding?
A term sheet can be fully binding, partly binding or largely non-binding. In many transactions, the parties want the main commercial terms to remain non-binding until definitive documentation has been signed. At the same time, certain provisions are often intended to apply immediately.
These may include confidentiality, exclusivity, costs, governing law, jurisdiction, non-solicitation, break fees, process arrangements and due diligence obligations. If parties want certain provisions to be non-binding, this should be stated clearly.
Under Dutch law, the analysis does not stop at the heading “non-binding term sheet”. Relevant factors include the wording of the document, the parties’ intentions, the degree of agreement on essential terms and the way the parties behave during the negotiation process.
Term sheets and broken-off negotiations
A term sheet may become important if negotiations are later discontinued. As a starting point, parties are free to break off negotiations, but that freedom is not unlimited under Dutch law.
If one party has created a legitimate expectation that a definitive agreement would be concluded, walking away may have legal consequences in certain circumstances. The risk increases where the parties have agreed on essential deal terms, exclusivity has been granted, due diligence is advanced or draft transaction documents are close to final.
This is particularly relevant in Dutch M&A and investment transactions where significant time and costs may be incurred before signing.
Term sheet or letter of intent?
A term sheet and a letter of intent, or LOI, are closely related. Both documents record the key principles of a proposed transaction.
A term sheet is often more concise and commercially focused. A letter of intent is usually more detailed and may contain more extensive process arrangements, confidentiality provisions, exclusivity, due diligence rules and conditions for the next phase.
The name of the document matters less than its content. In both cases, it should be clear which provisions are binding, which terms remain subject to negotiation and when the parties may still walk away.
Term sheets for foreign investors in Dutch transactions
Foreign investors often use US or UK-style term sheets as a starting point. These can be useful, but they should be adapted to Dutch legal practice.
In a Dutch BV transaction, the term sheet should take into account notarial share issuance or share transfer requirements, shareholder approvals, pre-emption rights, articles of association, employee consultation issues, Dutch corporate governance and the interaction with the future shareholders’ agreement.
In venture capital transactions, the term sheet should also properly address valuation, liquidation preference, anti-dilution, founder vesting, investor consent rights and information rights. In M&A transactions, the focus is often on structure, purchase price mechanism, due diligence, warranties, indemnities, disclosure, conditions precedent and closing mechanics.
Term sheet review or drafting
A well-drafted term sheet creates clarity before the parties spend time and costs on due diligence and definitive documentation. A poorly drafted term sheet can create uncertainty, disputes about binding effect or misalignment between the commercial deal and the final legal documents.
Dirk de Waard advises entrepreneurs, investors, buyers, sellers, founders and M&A advisers on term sheets, letters of intent, exclusivity arrangements, due diligence processes, pre-contractual liability and the transition from term sheet to definitive transaction documentation.
Questions about a term sheet for a Dutch acquisition, investment round or joint venture? Send an email to dirk.dewaard@viottalaw.com.
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By VIOTTA.
