Most mergers and acquisitions begin with a non-binding agreement on primary terms. If you’re considering a business transaction, you might wonder how non-binding agreements on primary terms work. Primary agreements are critical to the negotiations process, but it’s important to draft them carefully in order to ensure that they have their intended effect. Here’s what you should know about non-binding agreements on primary terms in mergers and acquisitions:
What is a non-binding agreement on primary terms?
In a merger or acquisition, a non-binding agreement on primary terms is a document that lays out the rough terms of the business transaction. It allows the parties to put some terms on paper and then work to iron out the details. A non-binding agreement lays the framework for additional negotiations in hopes of finalizing the merger or acquisition.
What’s the purpose of a non-binding agreement on primary terms?
Parties enter into non-binding agreements as a way to facilitate business negotiations. A preliminary agreement allows the parties to ensure that they’re generally on the same page when it comes to the terms of the agreement. In that way, the agreement helps them ensure that there’s a good chance that their negotiations are going to be worth their while. A preliminary agreement also helps the parties agree on terms for negotiating.
What’s in a non-binding agreement on primary terms?
A non-binding agreement on primary terms may contain any number of terms. The exact language depends on the preference of the parties. A non-binding agreement on primary terms might include any of the following provisions:
- Timeline for negotiations
- Goal timeline to reach a final deal
- Scope of negotiations – what entities, goods or services are up for discussion
- A general purchase price
- Choice of law for interpretation of the agreement
- Defined damages for a violation of the agreement
- A statement that the parties are not required to reach an agreement
Is a non-binding agreement ever binding?
Although it might seem ironic, a non-binding agreement can be binding. The entire agreement may be binding, the entire agreement may be non-binding or portions of the agreement may be binding. When you draft a non-binding preliminary agreement, it’s critical to take into account whether you want the agreement to be binding in any way. If you don’t want to require that the parties reach a final agreement, you should also consider whether you want any preliminary terms to be binding while you work on negotiating a final deal.
What parts of a non-binding agreement may be binding?
Some of the parts of a non-binding agreement that may be enforceable include:
One part of a non-binding agreement on primary terms that’s often binding is a confidentiality requirement. A confidentiality agreement requires the parties to keep the negotiations a secret for a period of time. The reason for a confidentiality agreement is to prevent third parties from trying to compete for business. Even if the agreement doesn’t ultimately require the parties to reach a final deal, a confidentiality clause in a non-binding agreement can be enforceable.
Most non-binding preliminary agreements require the parties to negotiate exclusively for a period of time. A party in negotiations generally can’t shop the offer around to third parties until the parties involved in negotiations have time to fully explore the possibilities for a final agreement. In addition to confidentiality requirements, exclusivity provisions require the parties to negotiate only with each other for a set period of time.
If a non-binding preliminary agreement contains a good-faith clause, the parties must negotiate with each other in good faith. A good-faith clause ensures that neither party wastes their time preparing information or conducting due diligence if the other party isn’t really interested in the deal. Good-faith clauses are typically binding during a negotiation period if they’re a part of the preliminary agreement.
How do I know if a non-binding preliminary agreement is enforceable?
A non-binding agreement can specifically state what terms are terms are binding and non-binding. If the agreement explicitly states what provisions are enforceable, that can go a long ways to determine whether the agreement or any of its provisions are binding. In addition, the courts look at the intent of the parties and their behavior. They look at whether the contract is ambiguous. The court interprets a non-binding agreement in the same way that they interpret any other kind of contract.
What’s the penalty if a party violates enforceable terms in a non-binding agreement?
A non-binding preliminary agreement can include liquidated damages. The parties can agree on an amount that a party has to pay if they breach the enforceable provisions of the agreement. Damages for a breach might seek to compensate the non-breaching party for the time and expense that they invest in negotiations. Damages might also try to give the non-breaching party the benefit of the bargain. The damages that apply might depend on the body of law that applies to the agreement.
Choice of law considerations
Because interpretation of a preliminary agreement often depends on the body of law that applies, each party should carefully consider whether to include a choice of law provision in their agreement. An agreement may be governed by the laws where either party is located. An agreement may be interpreted by the laws whether either business is incorporated. The parties can choose the body of law that applies by stating a choice of law provision in their agreement. A choice of law provision can take some uncertainty out of how damages might be calculated in the event of a breach. Each party to a non-binding agreement should consider how each state interprets contracts and what law they want to apply to the agreement.
Be wary of emails and electronic signatures
One thing to be aware of when you’re negotiating a preliminary non-binding agreement is emails and the prevalence of electronic signatures. Most states have laws that are quite permissive in terms of using an electronic signature to execute a binding agreement. Parties negotiating or discussing through email shouldn’t assume that what they state in email is non-binding just because it’s in an email. Remember to be clear in preliminary emails in order to avoid surprises and misunderstandings that can turn into litigation.
Using a preliminary, non-binding agreement to your benefit
A non-binding, preliminary agreement is a common and important part of most mergers and acquisitions. As you draft an agreement, it’s important to carefully consider whether you want each provision of the agreement to be enforceable. Then, it’s important to effectuate your wishes in the agreement. An experienced mergers and acquisitions attorney can help you pursue your goals and avoid pitfalls in the negotiation and drafting process. Call us today or fill out our online contact form to speak with our team about your specific situation.