DealLawyers.com Blog

I think most lawyers are well-acquainted with the potential perils of a letter of intent, term sheet or other preliminary transaction document being regarded as binding in one or more respects. However, what’s probably not on most people’s radar screens – or at least not on mine – is the possibility that such a document may have an “afterlife” such that it is binding even after the parties have executed a definitive acquisition agreement. However, this Mayer Brown memo says that in some cases, term sheets and similar documents may in fact have that result:

In most cases, a term sheet serves a limited purpose and is replaced by a definitive agreement (or set of agreements) that incorporates the full set of deal terms. With a definitive agreement in place, parties may believe that the binding provisions of the term sheet are no longer in force. However, under Delaware Law, a definitive agreement does not supersede the binding provisions of a term sheet unless one of the following is true:

– The provisions of the definitive agreement contradict the binding provisions of the term sheet, in which case the term sheet will be superseded only to the extent of those contradictions.

– The parties expressly agree that the term sheet is no longer binding. Often, a definitive agreement will accomplish this by including an integration clause (sometimes referred to as a “merger” or “entire agreement” clause). A standard integration clause states that the definitive agreement supersedes all other agreements between the parties with respect to its subject matter. An integration clause creates a presumption that there are no additional terms outside of the agreement (including a term sheet) that will change the terms of the agreement.

However, like any other contractual provision, integration clauses are interpreted according to their plain meaning, and the presumption of integration may be rebutted with evidence (including contractual terms and the parties’ course of dealing) that show an intention for the term sheet to remain in force alongside the definitive agreement

The memo reviews several Delaware decisions in which obligations imposed by term sheets have survived the execution of a definitive agreement and identifies several factors which may contribute to a conclusion that those provisions survive.

These include situations where the purpose or subject matter of the term sheet differ from those of the definitive agreement, where the term sheet includes provisions not addressed in the definitive agreement, and where the parties to the term sheet differ from the parties to the definitive agreement. The memo also points out the role that the parties’ course of dealing may play in a court deciding that the term sheet survives the signing of the definitive agreement.

– John Jenkins