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Investor of additional due diligence. Otherwise, the Investor may find itself forced, pursuant to
the Term Sheet, to make an investment that subsequent investigation or events demonstrate was
not in its best interests.
One significant exception to the non-binding nature of a Term Sheet often arises with
regard to expenses. Term Sheets frequently provide that, although the main provisions are non-
binding, certain expenses of the Investor are to be borne by the Company, even if the transaction
is never consummated. If this is the intention of the parties, the Term Sheet should specifically
state that the parties are legally bound by such a provision. If the parties have not entered into a
separate confidentiality agreement, the Term Sheet may contain binding provisions regarding
maintaining confidentiality of information supplied by the Company and possibly the negotiation
of the transaction itself.
An Investor sometimes will require Companies to agree to an exclusive negotiation
period, sometimes referred to as a “no-shop” period. Given that the Investor may have expended
significant time and effort in conducting due diligence and negotiating deal terms, an Investor
will not want the Company to use the Term Sheet to leverage better deal terms from other
Investors. Companies, however, should exercise caution in agreeing to a no-shop. Agreeing to a
no-shop too early in the process may foreclose better opportunities. In addition, a no-shop can
be increasingly coercive when the Company is close to running out of money. Ultimately, from
the Company’s perspective, a no shop is problematic because Investors do not have an obligation
to proceed with the investment. With no guarantee of a deal, the Company may be left with no
options or bad options at the end of the no-shop period. Whether the Company should ultimately
agree to a no-shop period will depend on a number of factors, including, among others, the
Company’s financial condition, the negotiating leverage of the parties and market conditions.
Despite the non-binding and summary nature of the Term Sheet, it is not uncommon for
the Company, upon receipt of the first draft of the definitive agreements, to exclaim, “but this
wasn’t in the Term Sheet!” Accordingly, it is important to include all key provisions in the Term
Sheet, while, explicitly conveying the message to the Company that the Term Sheet will not
contain every provision of the transaction as finally documented.
III. Terms that Impact Economics.
A. Type of Securities.
The Term Sheet will indicate the type of securities that the Investor contemplates
purchasing, whether common stock, preferred stock, warrants, debt securities, partnership
interests, membership interests, another type of security, or some combination of the foregoing.
If debt securities are involved, the Term Sheet should state whether the debt is to be subordinate
to debt from banks, financial institutions, trade creditors, or other third parties. If common stock
is to be purchased directly, or upon the conversion of other securities, the Term Sheet should
indicate whether the common stock is to be of the same class or series as existing shares of
common stock, or a new class or series with different voting rights. If preferred stock is
involved, the Term Sheet should indicate the rights, preferences, restrictions, conversion rights,
voting rights and other special or relative rights of such preferred stock, many of which are