Term Sheet (TS) has become a key preliminary instrument in Brazilian corporate and financial transactions, especially in the midst and post- pandemic.
TS is signed as a pre-contract, where the parties negotiate basic terms and conditions of what they intend to sign. If the structure and most important conditions cannot be settled, it is already a bold indication that the business should not proceed to closing of the final agreements.
Term Sheets are widely used in Brazil in both equity transactions (Angel Investment, Venture Capital, Private Equity, Corporate Venture), and complex credit and financial transactions.
It must contain information, such as:
1. in equity transactions: purchase price (or formula), form of payment and scrow account (if any), closing conditions, acquirer’s management and governance powers (in minority acquisitions), liability for past, present and future liabilities, among others, and
2. in finance transactions: facility amount, conditions for withdrawal, affirmative and negative covenants, collateral, among others.
The current pandemic has brought a great deal of prominence to Term Sheets, since numerous acquisitions and financing have been placed “on hold”, based on “Material Adverse Change (MAC)” clause. Which means that one of the parties would have the right to suspend or cancel the fulfillment of its obligations (ex. pay the purchase price or disburse a credit line) by invoking the MAC clause, given the force majeure event generated by Covid-19.
Terms Sheets must contain the basic conditions of the transaction, as well as relevant legal provisions such as (i) whether it is binding or non-binding, (ii) whether there is exclusivity period, (iii) confidentiality, (iv) who is responsible for costs, and more boilerplate clauses.
We noticed that the use of TSs increased after the pandemic started. Regardless of size, negotiations and proposals for M&A and financial operations should be summarized in TSs whenever possible, following a simple and objective language that gives legal certainty to the parties.