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 in which parties explore the price and conditions. Although parties are still only exploring options in the initial phase, it is recommended to 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 business-sensitive information at an early stage to a potential buyer. 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 (under certain circumstances) transfer of the obligation to third parties; and
  • a penalty clause for violation of the confidentiality obligation.

Of course, the intention of the non-disclosure agreement is that both parties 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 to not block the possibility of compensation, it is recommended to include a separate clause.

With regard to the pre-contractual phase, the Supreme Court has established 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 judge to continue to negotiate or to compensate the other party for damages.

Term sheet vs. letter of intent

If the parties have exchanged sufficient 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);
  • whether a due diligence is carried out;
  • a timeline for the acquisition and a target closing date;
  • extent of confidentiality;
  • (non-)exclusiveness;
  • when and how negotiations can be broken off and their consequences;
  • 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 so-called ‘pre-agreement’.

A preliminary agreement is in itself a (binding) agreement in which parties prepare the conclusion of the agreement that they ultimately had in mind (read: 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 content 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 be 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 lawyers of) the parties, with several draft versions being sent back and forth before a final version is signed.

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

Signing the SPA is called the signing. The share transfer therefore does not take place immediately. This is done via the notary. The passing 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 content. For more information, please contact lawyer Dirk de Waard on | +31 20 24 80 602.

Viotta Law - Dirk de Waard

Dirk de Waard


If you need a legal opinion under Dutch law, please do not hesitate to contact our legal opinion expert Dirk de Waard at


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