2021 is demonstrating to be one of the most active years for M&A and loan transactions, particularly in the tech, health and agribusiness.
The kick-off of complex corporate and financial deals with Brazilian parties is generally 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 such legal documents and their basic clauses.
1. When to Use 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. Key Clauses in Term Sheets: (i) Is the credit offer binding on the lender? If the credit line offered is not binding, it is essential that it be expressed in the TS to avoid doubts; (ii) Validity term: Term Sheets must have an express validity/expiration period. If not signed by date “X”, it will be automatically canceled; (iii) Right to cancel the Term Sheet; and (iv) Terms are not exhaustive: lenders must express in the Term Sheets that the terms and conditions set forth therein are summarized and that the principal contract will contain additional provisions.
3. When to Use MOU and LOI: MOUs and LOIs are mostly 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.
4. Key Clauses in MOUs and LOIs: (i) Assessment of the project: in Joint Ventures, it should provide for a deadline for the partners to decide on whether to proceed or not with the project; (ii) Exclusivity: in M&As, there will be an exclusivity period granted by the seller to the buyer to assess the target and make an offer (e.g. 60, 90, 180 days)? After the stipulated period, the parties would be free to contact third parties; and (iii) Other important legal aspects: the parties should pay attention to whether MOUs and LOIs are binding, termination clause, confidentiality, prohibition or not of soliciting employees of the other party, applicable law and conflict resolution.
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.