Heads of Terms Share Sale UK: Key Clauses Explained

Overview

Heads of Terms, sometimes called a Term Sheet, Letter of Intent, or Memorandum of Understanding, are a short written summary of the main commercial terms agreed between a buyer and seller of shares in a company. They sit at the front end of the transaction, before detailed drafting begins, and give the parties a shared reference point as negotiations move forward.

For share sales specifically, the document usually sets out who is buying what from whom, the headline price and how it will be paid, any conditions that have to be satisfied before completion, and the scope of warranties and restrictions the seller will accept. It often also deals with how the parties will behave during negotiations: keeping discussions confidential, not talking to other buyers for a fixed period, and who pays their own costs if the deal falls through.

Although most clauses are expressed as non-binding, certain provisions are usually drafted to have legal effect. This mixed status is deliberate and commonly accepted in UK corporate practice.

Key steps

1. Identify the parties and the shares. Set out the full legal names of the buyer, the seller, and the target company, including company numbers where relevant. Describe exactly which shares are being sold, whether that is the entire issued share capital or a specific percentage, so there is no ambiguity about what the deal actually covers.
2. Agree the price and payment structure. State the headline consideration and how it will be paid. This might be cash on completion, deferred payments, an earn-out linked to future performance, or a mix. Flag any adjustments to the price that will be calculated closer to completion, such as working capital or net debt adjustments, and note the assumptions behind the figure.
3. Set out conditions and timetable. List the key conditions that must be met before completion can happen, such as due diligence, board or shareholder approvals, regulatory consents, or third-party agreements. Include a target exchange and completion date so both sides know what they are working towards and can plan resourcing accordingly.
4. Outline warranties, indemnities and restrictions. Indicate the scope of warranties the seller will give in the full agreement, any expected indemnities for known issues, and any limits on the seller's liability. Also summarise non-compete and non-solicitation restrictions the seller will accept post-completion, along with their duration and geographic scope.
5. Mark what is binding and what is not. Clearly state that the commercial terms are subject to contract and not legally binding, but identify the clauses that are binding, typically confidentiality, exclusivity, costs, and governing law. This avoids later arguments about whether one side was locked in before the Share Purchase Agreement was signed.

Common questions