Selling or buying a business-Use a term sheet
- By : Wong Mei Ying
- Category : Article, Mergers and Acquisitions
Article
When selling or buying a business, whether via a sale and purchase of shares or via a sale and purchase of assets, the seller and the purchaser should consider using a term sheet to set out the principal terms and conditions of the transaction. Having a term sheet enables the parties to consider the big picture, rather than fixating on certain aspect of the transaction, such as the consideration amount. Having a term sheet also assists the parties to avoid misunderstanding and identify “deal-breakers” at the early stage of the transaction.
A term sheet is generally non-binding and is not intended to constitute an exhaustive terms and conditions of the transaction.
The following is a template for drafting a term sheet. The left hand side are the typical headers for the terms and conditions. The right hand side is where the terms and conditions should be set out. In the template below, the matters to be considered when drafting the terms and conditions have been set out on the right hand side to assist readers with the drafting. Even if the parties do not intend to execute a term sheet and prefer to go straight into a sale and purchase agreement, the following template provides some pointers on the terms to consider before inking the deal.
| Principal Terms and Conditions of the Sale and Purchase of [insert subject matter] | ||
| 1. | Sale and Purchase: | This section is to describe the subject matter of the sale and purchase, whether business assets or shares of a company (“Target”). |
| 2. | Purchaser: | This section is to set out the identity of the purchaser including the name of the purchaser. |
| 3. | Seller(s): | This section is to set out the identity of the seller(s) including the name of the seller(s). |
| 4. | Consideration: | This section is to set out the terms and conditions relating to the consideration for the transaction including the following: (a) the amount of consideration; (b) the mode of satisfaction of the consideration, such as whether the payment is by way of cash or issuance of shares; (c) whether any deposit is payable; (d) whether the consideration is payable in a few tranches; (e) whether there is any retention sum, namely a portion of the consideration being retained post completion of the transaction and this portion of the consideration is subject to certain agreed conditions being met; (f) the time of payment of the consideration; (g) whether the consideration is a fixed sum or subject to adjustment based on the financial position of the Target as of a cut-off date. |
| 5. | Profit Guarantee: | Where relevant, this section is to set out any guarantee given by the seller in respect of an agreed amount of profit to be achieved by the Target within a specified time period; the agreed timetable and payment to the seller if the profit guarantee is met; the principles and procedures for determination of the profit and the consequences if the Target does not meet the profit guarantee (if any). |
| 6. | Earn-out: | Where relevant, this section is to set out the amount of earn-out payable to the seller; the agreed timetable for the payment of the earn-out and the principles and procedure for determination of the seller’s entitlement under the earn-out (if any). |
| 7. | Definitive Agreements: | This section is to set out the agreements which need to be executed for the transaction. Typically, the definitive agreements include the sale and purchase agreement, shareholders’ agreement (if required) and service agreement with the key management of the Target (if required). |
| 8. | Conditions Precedent: | This section is to set out the conditions which must be fulfilled prior to the agreement becomes unconditional. Typically, the agreement would provide that after the agreement becomes unconditional, failure to proceed with the transaction would render the defaulting party liable for damages suffered by the other party. The usual conditions precedent include: (a) if the seller is a corporation, board of directors’ resolution of the seller to approve the transaction and to enter into the definitive agreements having been passed; (b) if the purchaser is a corporation, board of directors’ resolution of the purchaser to approve the transaction and to enter into the definitive agreements having been passed; (c) if the transaction is structured as a sale and purchase of shares, board of directors’ resolution of the Target to approve the registration of the share transfer in the name of the purchaser having been passed; or if the transaction is structured as a sale and purchase of business assets, board of directors’ resolution of the Target to approve the transfer of the business assets; (d) legal, financial, tax, environmental, operational and any other due diligence review on the Target and the findings of such due diligence being satisfactory to the Purchaser; (e) execution of service agreements between the Target and key management of the Target (if required); (f) approvals from the relevant authorities in the relevant jurisdictions (if required); (g) approvals from the financiers of the Target for the change of shareholders of the Target or disposal of business assets of the Target (if applicable); and (h) such other approvals, notifications and/ or registrations, if required. |
| 9. | Employees: | This section is to set out the seller’s and purchaser’s obligations towards the employees of the Target upon completion of the transaction. This may be subject to the laws of the relevant jurisdictions. In Malaysia, the rights of an employee whose wages does not exceed RM2,000 (“EA Employee”) is regulated under the Employment Act 1955 (“EA 1955”). Section 12(3) of the EA 1955 provides that where termination of service of an EA Employee is attributable wholly or mainly to the fact that a change has occurred in the ownership of the business, the employer shall give notice of termination of service to the EA Employee with the length of notice as prescribed under the EA 1955. Regulation 8(1) of the Employment (Termination and Lay-of Benefits) Regulations 1980 (“Employment (Termination and Lay-of Benefits) Regulations”) provides that where a change occurs in the ownership of a business or part of such business for the purposes of which an EA Employee is employed, the EA Employee shall not be entitled to termination benefits if within 7 days of the change of ownership, the new owner of the business offers to continue to employ the EA Employee under terms and conditions of employment not less favourable than those under which the employee was employed before the change occur and the employee unreasonably refuses the offer. If the new owner of the business does not offer to continue to employ the EA Employee in accordance with Regulation 8(1), the contract of service of the EA Employee shall be deemed to be terminated and the employer of such EA Employee before the change in ownership is liable to pay all termination benefits payable under the Employment Regulations. |
| 10. | Restrictive Undertaking: | This section is to set out the undertakings given by the seller which restrict the seller from competing with the Target within an agreed period of time after completion of the transaction. Subject to the laws and depending on the bargaining power of the parties, the restrictive undertaking may be extended to the seller’s related parties, subsidiaries (where the seller is a corporation) or the seller’s family members (where the seller is an individual). |
| 11. | Confidentiality: | This section is to set out the confidentiality obligations on the parties to safeguard information. |
| 12. | Exclusivity: | This section is to set out the exclusivity period during which the seller undertakes with the purchaser that the seller will not enter into negotiations with a third party for the sale of the business assets or shares in question and that the purchaser will have the exclusive right to negotiate with the seller for an agreed period of time. |
| 13. | Costs: | This section is to set out the costs to be borne by each party for the transaction such as legal costs of each party and stamp duty payable on the execution of the sale and purchase agreement and transfer of shares or assets. |
| 14. | Governing Law and Dispute Resolution: | This section is to set out the governing law and mode of resolving dispute, whether through court or arbitration. |
| 15. | Non Exhaustive: | The term sheet is not intended to constitute an exhaustive terms and conditions of the transaction. |
The information in this article is intended only to provide general information and does not constitute legal opinion or professional advice.
