M&A Activity -- Expect a Surge in Mergers
Merger and acquisition terminology can be confusing and subject to varying interpretations. Usually just the buyer signs a "Confidentiality Agreement." Occasionally buyers will require the seller to also sign. The document is legally binding and it promises that the buyer will not disclose its interest in acquiring the seller.
It promises to maintain all seller documented information in strictest confidence and to return such documents immediately if purchase discussions are abandoned. It further prohibits the buyer from soliciting the employment of any of the seller's employees, generally for a period of two years. Although it's much harder to obtain, it can prohibit the buyer from soliciting business from any of the seller's customers for some period of time.
A "Term Sheet" is a 1-3 page document that sets forth the economic terms and conditions of a buyer's offer to a seller. It is non-binding and can contain some non-economic terms and conditions. It is intended to reach a price understanding with a seller early on so as to avoid the legal expense of more costly, later stage documents and wasted time if the two parties cannot agree to economic value for the company.
A "Letter of Intent to Purchase" (LOI) is mostly non-binding except for language describing the term of the "stand still" that stops a seller from negotiating with another buyer and for confidentiality provisions. It is generally a 3-10 page document that is signed by both parties. It usually sets forth the major economic and legal terms and conditions of the proposed transaction. It defines the buyer's timing for, and practices for, conducting due diligence. In some cases it may contain a Break Up Fee provision providing that a penalty be paid by the party who abandons the transaction.
Break Up Fees can also be known as Topping Fees and are intended to compensate the injured party for legal and other expense in the event that either abandons the deal prior to closing.