The kick-off of complex corporate, financial, and commercial transactions with Brazilian parties must be made with the formalization of preliminary contracts, such as Term Sheet, Memorandum of Understanding (MOU) and Letter of Intent (LOI).
A recurring question is when to use either type of legal documents.
1. Term Sheet: Although it is not a rule, Term Sheet is used more in banking/financial transactions, such as direct or trade finance loans, bond and capital market issuances, and in Venture Capital, Corporate Venture and Private Equity deals.
2. MOU and LOI: MOUs and LOIs are most used in (i) commercial negotiations, such as long term supply, technology/know-how licensing and strategic partnerships, and (ii) in corporate transactions, such as M&As and Joint Ventures.
3. What to Include in Them: Parties sign these preliminary contracts to summarize the main terms and conditions of the underlying transaction, such as (i) in M&A, purchase price, form of payment, closing conditions, buyer’s management powers, and governance, responsibilities, indemnifications, among others, and (ii) in finance, the loan amount, form of disbursement, conditions for withdrawal, affirmative and negative covenants, collateral, etc.
They must also provide (i) whether they are binding or non-binding, (ii) whether there is an exclusivity period, (iii) confidentiality, and (iv) who is responsible for costs, among others.
Providing the basic business terms into preliminary contracts such as Term Sheet, MOU and LOI, as the case may be, provides undoubtedly greater legal certainty and time savings for the parties involved in negotiations with Brazilian companies.