Draft Term Sheet Acquisition

Acquisition Term Sheet

An acquisition term sheet (also called a Letter of Intent or LOI) is the first formal document in an M&A process — it aligns Buyer and Seller on the material commercial terms before either side incurs the cost of a full due diligence exercise and definitive documentation. The binding/non-binding distinction is critical: if drafted carelessly, certain provisions can unintentionally bind the parties.

When to use this

• Following initial commercial negotiations where both parties have reached substantive agreement on headline terms
• As a prerequisite to commencing due diligence (particularly when access to confidential information is to be shared)
• As the foundation document for the definitive Share Purchase Agreement or Asset Purchase Agreement
• As a pre-cursor to regulatory filings where regulators require a signed LOI before reviewing an application

Required inputs

Optional inputs

• Reverse break fee (if Buyer walks without cause)
• Target break fee (if Seller accepts a competing offer during exclusivity)
• Management retention terms (if key employees are critical)
• Earn-out high-level mechanics (if earn-out is part of the consideration)
• Governing law for the term sheet itself (binding provisions)

Document Structure

1. Parties and Purpose

One paragraph identifying Buyer, Seller, and Target; purpose: the parties wish to record the principal terms upon which Buyer proposes to acquire [Target] from Seller. State that the term sheet is subject to the satisfactory completion of due diligence and execution of definitive documentation.

2. Transaction Structure

Specify clearly whether this is:

• Share purchase: Buyer acquires legal and beneficial title to all/majority of the shares; Target company survives with all its history (liabilities included)
• Asset purchase: Buyer acquires specified assets and liabilities; Target remains as an entity but without the acquired assets; cleaner liability picture but more complex to structure
• Merger: legal amalgamation; typically requires regulatory process; less common in MENA

The choice has major tax consequences:

• Share purchase: no transfer of assets for VAT purposes; stamp duty / transfer taxes on the shares
• Asset purchase: VAT may apply to the transfer of business assets; potential for asset stepped-up basis (favorable for Buyer)
• In UAE onshore and KSA, obtaining professional tax advice before committing to structure is essential given VAT (5% UAE; 15% KSA) and corporate tax implications

3. Purchase Price and Payment Mechanics

4. Working Capital Adjustment Mechanism

If a working capital adjustment is included:

• Define "Working Capital" precisely (current assets minus current liabilities; specify what is and is not included)
• Set a target working capital amount (based on historical average)
• Process: Seller prepares an estimated working capital statement at close; Buyer prepares a final working capital statement within 60 days post-close; disputes to an independent accountant
• Adjustment: if actual working capital > target, Buyer pays the excess; if actual < target, Seller returns the shortfall

5. Conditions Precedent

List conditions that must be satisfied before the parties are obliged to close. Common conditions:

• Regulatory approvals: competition clearance (if applicable), FDI/foreign investment approval, sector-specific regulatory approvals (KSA CMA, UAE CBUAE/TDRA/ADGM FSA depending on sector)
• Third-party consents: material contracts with change-of-control provisions that require consent to assignment
• Shareholder approvals: if Seller's corporate constitution requires shareholder approval for the disposal
• Due diligence: satisfactory completion of Buyer's due diligence (due diligence condition should be either removed or defined with a materiality threshold — an open-ended "satisfactory due diligence" condition creates a subjective out)
• No Material Adverse Change (MAC): definition matters enormously; typical MENA practice:
  • MAC = a change that has or would reasonably be expected to have a material adverse effect on the Target's business, financial condition, or results of operations
  • Carve-outs: general economic conditions, industry-wide events, changes in law, pandemic-related events (heavily negotiated post-COVID)
• Employee retention: key employees have signed offer letters for continued employment post-close

6. Representations and Warranties Scope (High-Level)

State at a high level that Seller will make customary representations and warranties in the SPA covering:

• Title and authority
• Financial statements accuracy
• Absence of undisclosed liabilities
• Compliance with law
• Material contracts and no material breach
• Intellectual property ownership
• Employment — no undisclosed severance commitments
• Tax — returns filed; no outstanding disputes
• No material litigation

The detail will be set out in the SPA; the term sheet signals the scope and the indemnification framework.

7. Indemnification Framework

8. Restrictive Covenants on Seller

• Non-compete: Seller and key individuals shall not compete for [2 years] in [geographic scope]; confirm this is appropriate for the jurisdiction
• Non-solicitation: no poaching of Target's customers or key employees for [2 years]
• Seller should confirm that these covenants, combined with any existing employment restrictions, are enforceable under the governing law

9. Key Employee Retention

If Buyer is relying on specific management to continue, state:

• Key employees to be identified and offer letters executed before close
• Retention period and terms (salary, benefits, equity rollover)
• Whether key employee retention is a condition precedent to closing

10. Termination Rights

11. Exclusivity / No-Shop Period

Duration: 30–60 days from execution of the term sheet.

Scope: Seller shall not, and shall procure that Target and its representatives shall not, directly or indirectly: (a) solicit, initiate, or encourage any competing acquisition proposal; (b) provide information to any third party in connection with a competing proposal; or (c) enter into discussions or negotiations regarding a competing proposal.

This is the most commercially important binding provision in the term sheet.

12. Expenses and Break Fee

• Each party bears its own costs in connection with the transaction (standard)
• Break fee (if agreed): payable by [Seller/Buyer] if [trigger condition] occurs; amount typically 1–3% of the purchase price
• Reverse break fee (payable by Buyer for regulatory failure or financing failure): more common in public M&A; negotiate in private deals where regulatory approval is uncertain

13. Binding vs Non-Binding Provisions

Non-binding: all transaction terms (structure, price, conditions, warranties scope, restrictive covenants) — these are subject to negotiation and definitization in the SPA.

Binding: the following are legally binding from execution:

• Exclusivity / no-shop (critical)
• Confidentiality
• Break fee provisions (if included)
• Governing law for the term sheet itself
• Expenses allocation

State this clearly: "Sections [X] (Exclusivity), [Y] (Confidentiality), and [Z] (Expenses) are intended to be legally binding. All other provisions of this Term Sheet are non-binding and subject to negotiation and execution of definitive documentation."

14. Governing Law and Dispute Resolution

The binding provisions of the term sheet (exclusivity, confidentiality) should specify a governing law and a dispute resolution mechanism. Arbitration is preferred for MENA cross-border transactions.

MENA-Specific Considerations

Regulatory approval timelines

MENA regulatory approvals can be significant:

• UAE competition authority (CECO) notification: if merger notification thresholds are met
• Sector-specific: ADGM FSA, DIFC FSA, UAE TDRA, KSA CMA — each has its own process and timeline (typically 30–90 days minimum)
• Foreign ownership approvals (ADIO in Abu Dhabi, MISA in KSA): particularly for sensitive sectors
• Build realistic closing timelines; experienced MENA M&A counsel should advise on regulatory risk early

No-shop: Arabic-language contract

If the Seller is a KSA or UAE onshore entity and the term sheet is in English only, confirm that the binding no-shop and confidentiality provisions will be enforceable. Consider having the binding provisions clause included in both English and Arabic with a consistency statement.

Document Follow-Up Chain

Term Sheet (signed)
    ↓
Due Diligence (financial, legal, tax, technical)
    ↓
Disclosure Schedule preparation (Seller)
    ↓
Definitive SPA (see [[draft-share-purchase-agreement]])
    ↓
Ancillary documents (escrow agreement, transitional services, employment offers)
    ↓
Regulatory filings and approvals
    ↓
Closing

Related skills

• [[draft-share-purchase-agreement]]
• [[draft-asset-purchase-agreement]]
• [[draft-nda-mutual]]
• [[draft-shareholders-agreement]]
• [[review-spa-buyer-side]]