Keep the term sheet simple. Pretty please…?

tutti fruttTerm sheets come in many flavours, from simple vanilla, through ‘99‘ to tutti-frutti.  This blog has previously discussed some of the choices that the drafter or adviser faces, including:

  • is it to be called a term sheet or a memorandum of understanding, heads of terms, heads of agreement or letter of intent?
  • is it to be binding, non-binding or a hybrid (some provisions binding, and some not)?
  • which law will apply, and in light of the laws of civil code countries is it necessary to state (a) that a party can withdraw from the negotiations at any time without liability, and (b) that the negotiations are being conducted on a non-exclusive basis?
  • what happens if the term sheet is stated to be non-binding, but the parties proceed as if they had an agreement in place, and fail to enter into any more detailed agreement?

square coneA further issue that IP Draughts is increasingly seeing is a mismatch in expectations between the parties when they draft and negotiate one of these preliminary documents.  Some clients take the view that they are commercial documents, and don’t need the input of lawyers, except perhaps where a clause is required to state that the document is not legally binding.

Other parties take a different approach.  IP Draughts has recently seen a document, called a Memorandum of Understanding, which the parties negotiated over many months, and which concerned a research collaboration.  It started off short and sweet, but by the time it had gone through rounds of drafting and negotiation, it ran to 23 pages and over 11,000 words.  One of the parties had clearly involved their IP lawyers, as the document contained complex IP ownership, option and licensing provisions.  These included 8 IP-related definitions that ran to nearly a page of text.  The other party had not involved lawyers and the negotiations had been led by a scientist, who involved commercial colleagues periodically.

frankensteinThe MOU was stated to be legally binding.  It was a frightening document.  It was the carcass of a full agreement, with some flesh on the bones, but with some parts missing or horribly misshapen.  Some terms had been considered in forensic, legal detail (at least by one of the parties).  Some other provisions had been considered by the commercial parties, but had not received proper legal scrutiny and had some conceptual flaws, so would need re-thinking and re-writing.  Yet other provisions were dealt with in a very cursory fashion, in the expectation that they would be dealt with more fully when a ‘proper’ agreement was drafted.

Faced with this document as a starting point for drafting a full agreement, what was the drafter to do?  It was extremely difficult to work out which terms were:

  • ‘cast in stone’ and in final wording, which could not be changed
  • largely agreed, but the wording could be changed if an error was found or drafting improvements were required
  • agreed in outline, but the wording should not be treated as sacrosanct
  • up for discussion, because they hadn’t been debated and either party might prefer a different approach

on trendUsing term sheets or MOUs in this way is ultimately an expensive and inefficient process, as it adds to legal costs when the full agreement is drafted and negotiated.  There are obvious commercial attractions in ‘buttoning down’ as many issues as possible as quickly as possible in negotiations.  But if this goes beyond agreeing points of commercial principle and descends into the fine detail of wording, it would be much better to move straight to negotiating the full agreement.

There seems to be a current fad for putting too much detail into the MOU.  In IP Draughts’ view, the trend should be resisted.

What do readers think?

1 Comment

Filed under Commercial negotiation, Intellectual Property

One response to “Keep the term sheet simple. Pretty please…?

  1. A term sheet is the initiating document in a courtship. It is neither the marriage certificate nor the pre-nup.

    Consequently, the core commercial basics are required in whole or in part –but nothing more. ( A bare licence might be a good example for a TS, granted you put in the non-binding, until the lawyers draft, and the parties execute the final follow-up agreement.) So the TS should be simple, basic and fundamental. The TS is the crux, the nub, the pivot of the deal. Nuance, process, structure, definitional hurdles and the opportunities for a pettifoggery come later. You don’t fight over a pre-nup on the first date. The courtship — romantic or commercial — is about building trust and crystallizing a shared vision.

    The MOU is the next milepost on the road to crystallization. Some fleshing out is necessary and some is still tentative but the parameters are set, hence the hybrid MOU. One creeps further along this route building trust by conducting due diligence, checking the regulatory requirements, status of regulatory approvals, timings, market situations, global issues. Throw in a directors resolution authorizing the transactional resources and foreseen objective. True if there is little left of negotiate post MOU the MOU can become the de facto deal, the binding MOU. It is all about complexity, timing, trust, vision.

    None of this belongs in a TS and frankly by definition should not be there. If it is, then skip the TS and jump into the hybrid MOU or for that matter draft the final deal. However, precious few major deals start with that level of trust, knowledge, corporate culture similarity.

    Don’t propose on your first date; seduction comes with regrets.

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