Term Sheets and Heads of Terms

6.1One document, many names

At some point early in a deal — after the confidentiality agreement, usually before serious due diligence — the parties write down the outline of their bargain. That short document goes by a remarkable number of names: heads of terms (or “heads of agreement”, or just “the heads”), term sheet, letter of intent (LOI), or memorandum of understanding (MOU). English lawyers tend to say heads of terms; bankers and Americans say term sheet or LOI; MOU turns up in cross-border and government-flavoured deals. Do not be fooled by the labels — they all describe essentially the same thing: a short, mostly non-binding record of the key commercial terms agreed in principle, signed before the real contracts are drafted.

Why bother, if it mostly doesn’t bind? Because the heads do several jobs that nothing else does at this point in the deal:

• Alignment before the money is spent. Due diligence, drafting and negotiation burn serious fees — legal, accounting, regulatory. No sensible buyer commissions a full diligence exercise, and no sensible seller opens its data room, before both sides have checked they agree on price, structure and the handful of terms that could kill the deal. The heads are that check. If the parties cannot agree two pages now, they will not agree a hundred pages later.
• Board and committee approvals. A listed buyer like Atlas needs internal sign-off to pursue a €42 million acquisition. Boards approve deals by reference to a document: “we are authorised to proceed on the terms of the attached heads”. The same is true on the sell side, where a fund’s investment committee will want the exit terms on a page.
• A map for the drafting. The first draft of the SPA is written with the heads open on the other screen. Price, mechanism, conditions, cap levels — the drafter lifts them straight from the heads. A vague or silent heads of terms produces a first draft full of square brackets, and every square bracket is a future argument.

6.2What goes in a good heads of terms

There is no fixed form, but a well-drawn set of heads for a private share sale covers a recognisable checklist. The discipline is knowing what belongs at this stage and what is better left to the SPA: enough to commit the parties commercially, not so much that you are negotiating the SPA twice.

Two items deserve special mention. The first is the price mechanism. It is not enough to record “€42,000,000”: a headline number means nothing until you know how it will be adjusted for what happens to the business between the accounts date and completion. There are two standard approaches. One is the locked box: a fixed price built on a historical balance sheet, protected by anti-leakage covenants. The other is completion accounts: a price trued-up against a balance sheet drawn at completion. The two approaches allocate risk quite differently, and switching from one to the other mid-deal reopens the price itself. Choosing the mechanism at heads stage removes the single biggest fight from the SPA negotiation; Chapter 9 covers both mechanisms in depth. The second is conditionality. If completion will depend on a regulator — in Project Sunrise, the CBI approving Atlas’s qualifying holding under MiCA — say so now. The condition drives the timetable, the risk allocation for the gap period, and sometimes the choice of buyer.

6.3Binding or not? “Subject to contract”

The defining feature of heads of terms is that the commercial terms are not intended to be legally binding. English law lets the parties achieve that simply and reliably. A contract needs an intention to create legal relations. The phrase subject to contract is long-established shorthand for “we do not intend to be bound until a formal contract is signed”. Head the document “subject to contract”, say expressly which paragraphs are and are not intended to bind, and the courts will respect that allocation.

The standard architecture is therefore a document with two layers:

• The commercial terms — expressly non-binding. Price, mechanism, conditions, warranty package, timetable: statements of current intention, not promises. Either party can walk away, or seek to renegotiate, without legal liability (the commercial consequences are another matter — see 6.5).
• Specific clauses — expressly binding. Exclusivity, confidentiality, costs and governing law are carved out and stated to be enforceable. These are the terms that protect the parties during the negotiation, so they must have teeth even though the deal itself is not yet agreed.

One rule of English law shapes how the binding layer is drafted. In Walford v Miles the House of Lords held that a bare agreement to negotiate — even “in good faith” — is unenforceable. Such an agreement is too uncertain, because either party may lawfully walk away at any time for any reason. But a lock-out agreement — the seller’s promise not to negotiate with anyone else for a fixed period — is a negative promise of certain scope, and is enforceable if properly drafted. That is why exclusivity clauses are always framed as a lock-out for a stated number of weeks, and never as a promise to negotiate until the deal is done.

6.4A worked example: the Sunrise heads

Here is what this looks like in practice. By late March 2026, Atlas and Meridian had agreed the outline of Project Sunrise. Their advisers turned it into a short heads of terms signed on 3 April 2026 — thirteen weeks after the locked box date, fifteen weeks before the SPA. An extract (condensed from roughly one page):

Read it as a drafter. Where the parties had genuinely agreed, the heads are precise: the number, the mechanism and its date, the regulatory condition, the exclusivity period, the 25% cap. Where they had not, the heads say so honestly — “to be agreed”, “to be discussed following due diligence” — rather than papering over the gap with wording that each side would read differently. The asterisk device makes the two-layer architecture visible at a glance: four short paragraphs bind; the deal terms do not. And note what is absent: no attempt to draft the warranties, list the conditions to completion mechanics, or define leakage. That is the SPA’s job.

6.5Anchoring: why the heads matter more than they bind

Here is the paradox: the commercial terms of the heads are legally worthless, and yet in practice they are nearly immovable. Negotiators call the effect anchoring — the first written number becomes the reference point against which every later proposal is judged. A buyer who agreed a 25% warranty cap at heads stage and asks for 40% in the SPA draft is not making an argument; it is reneging, and will be made to feel it. The phrase “we agreed that at heads stage” is one of the most effective sentences in deal negotiation, precisely because it appeals to something stronger than law: the other side’s credibility. A party that resiles from the heads without a good reason — something genuinely discovered in diligence — signals that its word is not reliable, and pays for that in every subsequent point.

It follows that each side should think hard about what to fix and what to leave open:

• A seller should nail down early the points on which time works against it: the price mechanism (a locked box, agreed now, stops the buyer using diligence findings to re-trade the number through “adjustments”); the cap levels (25% conceded at heads is 25% in the SPA; a heads that is silent invites the buyer to open at 100%); and the exclusivity length (as short as credible — exclusivity is the seller giving up its auction leverage, so six weeks, extendable by agreement, beats an open-ended lock-out).
• A buyer should keep vague whatever it does not yet understand — above all the scope of specific indemnities pending due diligence. Atlas knew on 3 April that the CBI had written to Solaris; it did not yet know how bad the file deficiencies were, what remediation would cost, or whether a fine was likely. “To be discussed following due diligence” preserved its freedom to size the indemnity once it knew — and to anchor that negotiation with facts rather than guesses.

6.6From heads to SPA — and the clause that kills the heads

The heads of terms have a natural lifespan. They are born when outline agreement is reached, they govern the tone (if not the law) of the negotiation, and they die at signing. The instrument of their death is the entire agreement clause in the SPA. The clause declares the signed documents to be the whole of the bargain and expressly wipes away everything that came before — including, in Sunrise, the heads by name:

From 14 July 2026, then, nobody can rely on the heads for anything: not the non-binding deal terms, and not the binding islands either. Exclusivity has expired by its own terms, and costs and governing law are restated in the SPA (clause 16.1, clause 17.1). Confidentiality is taken over by clause 12.1, with the original NDA itself terminating at Completion under clause 12.4. If a term from the heads matters, it must be restated in the SPA; if it is not there, it is gone. Checking the signed SPA against the heads, line by line, is classic junior-lawyer work — and occasionally it catches a term everyone forgot to carry across.

To see how much work happens between the two documents, watch one term evolve. The specific indemnity was a single vague sentence in April; by July it had become a precisely engineered allocation of a known risk:

That evolution — from a marker to a machine — is the whole journey of a deal term, and the heads are where it starts. Here is the junior lawyer’s checklist when heads of terms cross your desk:

• Is the document headed “subject to contract”, and does it say expressly which paragraphs bind?
• Is any exclusivity a fixed-period lock-out (never an open-ended duty to negotiate)?
• Does the price come with a mechanism — locked box or completion accounts — not just a number?
• Are known conditions (regulatory approval, in particular) flagged?
• Has your client fixed the points it needs and kept open the points it doesn’t yet understand?
• At signing: check the SPA against the heads, and confirm the entire agreement clause supersedes them.

The heads assume the buyer will now investigate the target properly. What that investigation looks like — and what happens when it finds something — is Chapter 7: due diligence.