Before commencing a merger or acquisition, it is standard practice for the parties to enter into a term sheet. A term sheet functions as the commercial blueprint of the proposed transaction. It captures the key agreed terms, including purchase price, payment structure, timelines, conditions precedent, exclusivity, and liabilities.
Although commonly described as “non-binding”, a term sheet carries strong commercial and legal significance. Certain clauses, such as exclusivity, confidentiality, and governing law, are often legally binding even at this early stage. More importantly, the term sheet aligns expectations and prevents future disputes when drafting the formal Sale and Purchase Agreement (SPA).
Why do M&A transactions collapse?
In practice, most of the failed M&A transactions collapse due to unclear or vague early expectations. A well-drafted term sheet reduces negotiation friction, accelerates due diligence, and ensures both parties proceed with clarity and confidence.
To secure the deal after the execution of a term sheet, the purchaser is often required to pay a deposit. This is not merely a symbolic payment; it is a commercial instrument that converts serious intention into contractual commitment.
A deposit performs three critical functions:
- It locks the deal and prevents the vendor from offering the business to other buyers.
- It demonstrates the purchaser’s financial capability and seriousness.
- It triggers the vendor’s obligation to reserve the business exclusively for the purchaser.
Once a deposit is paid, the vendor is no longer free to “shop around” in the open market. The business is thereafter effectively removed from the open market, giving the purchaser commercial protection during due diligence and final negotiations. This safeguards the purchaser’s time, cost, and strategic planning.
Protective functions of a term sheet
One of the most important protective functions of a term sheet and deposit arrangement lies in the event of a vendor’s default.
If the vendor withdraws after accepting a deposit and agreeing to the term sheet without a valid legal justification, the purchaser is typically entitled to:
- A refund of the full deposit; and
- Additional compensation for losses incurred (subject to agreed clauses).
Such losses may include professional fees, due diligence costs, financing arrangements, and loss of commercial opportunity. This is precisely why proper drafting of compensation, forfeiture, and exclusive dealing clauses is critical at the term sheet stage.
Balancing Fairness
From a legal perspective, this framework balances commercial fairness by preventing vendors from misusing buyer interest, protecting purchasers from speculative withdrawals, and enforcing deal discipline.
In M&A transactions, it is always advisable to establish clarity from the outset to avoid costly disputes later. A properly structured term sheet combined with a well-regulated deposit mechanism ensures that:
• Negotiations are anchored to firm commitments;
• Commercial risks are controlled early, and
• Both parties proceed with mutual accountability.
In corporate transactions, protection does not begin at the signing of the final agreement; it begins at the term sheet.
Ellie Law, Ellie Law of Daphne Leong and Ellie Law Chambers
Ellie Law of Daphne Leong and Ellie Law Chambers is building a new kind of law firm—one grounded in empathy, education, and everyday people.
The views expressed in this article are those of the author. The content is provided for informational purposes only and should not be taken as professional advice. Readers are encouraged to consult a qualified professional before making any decisions.
