Vietnam: Deal Dynamics: A Practical Guide To SSA And SPA Negotiations (Chapter 3: Setting The Stage – Letter Of Intent, Term Sheet, And Memorandum Of Understanding)

Before diving into Share Subscription Agreements (SSA) and Share Purchase Agreements (SPA), parties often enter into preliminary agreements, such as a Letter of Intent (LOI), Term Sheet, or Memorandum of Understanding (MOU). This chapter will discuss these instruments, their content, and their role in the negotiation process.

3.1 The Role of LOI, Term Sheet, and MOU

These instruments serve as a "marriage proposal," laying out the intent of the parties and the basic terms of the deal without entering into a legally binding commitment. They help set the stage for further negotiations and provide a framework for the final agreement.

3.2 Non-binding Nature and Binding Exceptions

While most provisions in these instruments are non-binding, some clauses may be legally binding. Examples of binding clauses include confidentiality obligations, exclusivity agreements, and breakup fees, which may require the parties to adhere to specific terms even if the transaction doesn't materialize.

3.3 Key Components of LOI, Term Sheet, and MOU

These preliminary agreements typically cover several essential aspects of the deal, such as:

• Valuation: This refers to the agreed-upon value of the target company or shares, which forms the basis for determining the purchase price. Valuation methods can include discounted cash flow, market multiples, or asset-based approaches.
• Deal structure: This outlines the manner in which the transaction will be executed, such as through a share purchase, asset purchase, or merger. The structure may also specify the payment terms, such as cash, stock, or a combination of both.
• Holdback provisions: These clauses allow the buyer to withhold a portion of the purchase price for a specified period to cover potential liabilities, such as undisclosed debts, tax obligations, or litigation.
• Key representations and warranties (R&W): These are statements made by the parties, typically by the seller, about the target company's financial condition, assets, liabilities, operations, and other key aspects. R&W aim to allocate risk and provide the buyer with recourse in case of inaccuracies.
• Conditions precedent: These are requirements that must be satisfied before the transaction can close, such as obtaining regulatory approvals, securing financing, or completing due diligence.
• Post-closing covenants: These are ongoing obligations that the parties agree to fulfill after the transaction has closed, such as non-compete agreements, indemnification obligations, or post-closing adjustments.
• Role of management: This specifies the role that the target company's management team will play post-transaction, including potential changes in leadership, ongoing employment agreements, or equity incentives.
• Access to information: This outlines the level of access the parties will have to each other's records, data, and personnel for due diligence purposes and any restrictions or limitations on such access.
• Non-disclosure obligations: These clauses require the parties to maintain confidentiality regarding the transaction and any sensitive information exchanged during the negotiation process.
• Due diligence and timing: This section details the scope, process, and timeline for conducting due diligence, which involves the buyer thoroughly investigating the target company to identify potential risks and validate its value.
• Exclusivity and lock-up periods: These provisions prevent the seller from negotiating with other potential buyers for a specified period, ensuring the buyer has exclusive rights to pursue the transaction during that time.
• Breakup fees: These are fees paid by one party to another if the transaction fails to close under certain circumstances, such as a party backing out of the deal or breaching certain provisions.
• Non-binding and binding provisions: This differentiates between clauses that express the parties' intentions but do not create legal obligations (non-binding) and those that are legally enforceable (binding).
• Applicable law: This specifies the legal jurisdiction that will govern the interpretation and enforcement of the agreement, as well as any disputes that may arise between the parties.

3.4 Illustrative Examples

Example 1: A buyer interested in purchasing a company initiates negotiations by sending a non-binding LOI to the seller. The LOI outlines the proposed purchase price, deal structure, and other essential terms. The parties then engage in due diligence and further negotiations before signing a binding SPA.

Example 2: A venture capital firm provides a start-up with a term sheet that includes the proposed valuation, investment amount, and other key terms. After reviewing and negotiating the term sheet, the parties proceed to draft and execute a binding SSA.

3.5 Sample Provisions

Below are a few sample provisions that may be included in an LOI, Term Sheet, or MOU:

• Valuation: "The Buyer proposes to purchase 100% of the outstanding shares of the Company at an enterprise value of $10,000,000, subject to adjustments based on the closing date working capital and other agreed-upon terms."
• Exclusivity: "The Seller agrees to negotiate exclusively with the Buyer for a period of 60 days from the date of this LOI and not to solicit or entertain any other offers during this period."
• Confidentiality: "The parties agree to treat all information exchanged during the negotiation process as confidential and not to disclose it to any third parties without the other party's prior written consent."
• Breakup Fee: "In the event that either party terminates negotiations in bad faith or breaches any material obligation under this MOU, the breaching party shall pay the non-breaching party a breakup fee of $100,000."

In conclusion, LOI, Term Sheet, and MOU play a vital role in setting the stage for share transactions by outlining the parties' intentions and the basic terms of the deal. While mostly non-binding, these instruments may include specific binding provisions that parties must adhere to even if the transaction does not materialize. Understanding the role and content of these preliminary agreements is crucial for effectively negotiating and executing SSAs and SPAs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.