Is A Term Sheet Legally Binding?

It Depends.

Usually terms sheets are not legally binding, but it depends on the actual content of the document in question. Terms sheets vary considerably, but generally term sheets based off of U.S. law tend to fall into four different categories:

1) “The Parties Agree as Follows”

Some term sheets begin by stating “the parties agree as follows” but fail to explicitly say that the document is non-binding. This opens the door for an argument that these “term sheets” are in fact contracts that could potentially be binding, especially if it can be proven that the parties intended to be bound by the terms.

2) Nonbinding With Definitive Agreement

Many terms sheets explicitly state that they are not binding. However, oftentimes parties agree to enter into a definitive agreement once the terms have been negotiated. This can be construed as entering an agreement “negotiate in good faith”. If this is the case, a party cannot simply change their mind about the deal and want out, rather they are legally obligated to negotiate in good faith. This was recently articulated by a Delaware court (SIGA Technologies v. PharmAthene, Inc.) which held that an obligation to negotiate in good faith could be breached in an M&A term sheet, and the party that withdrew from negotiations could thus owe the other party expectation damages.

3) Some Provisions Nonbinding

Occasionally, term sheets have certain provisions that are binding and other provisions that are not. For example, many M&A term sheets have binding provisions around confidentiality and exclusivity, however the term sheet will explicitly state that while those provisions are binding, the other provisions are not.

4) Explicitly Nonbinding

Some terms sheets explicitly say that they are not binding, with no agreement to enter into a definitive agreement. In these cases, nothing in the term sheet is binding, rather it is simply an understanding between the parties.

Just because a document is being referred to as a terms sheet does not give it inherit legal authority. Rather, the actual content of the term sheet and the intention of the parties to be bound by it is what determines whether the document is or is not legally binding

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