Merger & Acquisition: What is a Term Sheet and Why You Need It?

Brief Overview of Merger and Acquisition

A merger and/or an acquisition (“M&A”) refers to a consolidation of companies. This transaction allows the company in question to effectively strategize, synergise and attain greater market power. Common steps in any M&A transaction include the issuance of a letter of intent/term sheet and signing of a non-circumvention & non-disclosure agreement (“NCNDA”) (crucial to ensure the details being disclosed by each party during the transaction stay confidential (i.e. trade secrets/know-how)) between the parties to the M&A before the execution of the definitive agreement of the transaction.

What is a Term Sheet and Why You Need It?

Term sheet is a key document containing basic terms of the transaction between the parties to an M&A, but it is not mandatory as the formalisation of the transaction will be done by way of i.e. a share sale agreement (“SSA”) or a shareholder’s agreement (“SHA”). However, a term sheet plays a vital role in negotiations i.e. between the buyer and the seller as it summarizes the key points of the proposed transaction and have the parties sort out the contentions or differences before the execution of the definitive agreements (e.g. the SSA or SHA) as well as before the commencement of the legal due diligence (this will be discussed more in depth in our subsequent article in this series so, stay tuned). This is especially helpful in clarifying the expectations by making clear the hurdles to be unravelled in order to move forward with the deal. Term sheet also induces both parties to enter into the negotiations in relation to the proposed transaction as it reflects the seriousness of each party to proceed in completing the proposed transaction.

What is the most common contention in M&A transactions?

Each party would deliberate on matters provided in a list of salient points to the term sheet and the most common contention the parties may have, would be the change in control. During an acquisition, one party comes in to purchase shares and the other party loses control from selling its shares – the new party through its acquisition of shares in the company have the right to appoint its directors into the board of directors of the company which cause changes to the management of the company.

In the event of consolidation of business, it involves the incorporation of a holding company that will acquire controlling interest in the shares of the merging companies. Shareholders of both merging companies would have a stake in the holding company. The most common problem that arises is the determination of percentage of the holding company that each group of shareholders will own.

Why You May Not Want a Term Sheet?

Nevertheless, having a term sheet executed as a foremost step does not necessarily guarantee the closing of the proposed transaction in view that there could be liabilities and/or non-compliances by the company in question which may be revealed from the findings of a legal due diligence exercise but were not disclosed by i.e. the seller in the beginning or during the execution of the term sheet. Furthermore, the drafting of a term sheet could also be costly depending on the complexity of the proposed transaction. Having said that, this should not deter the parties from having a term sheet in the preliminary stage as the advantages outweigh the risk of not having one done.

One of the many and notable difference between a definitive agreement and majority of the term sheet is that a term sheet is non-binding, therefore each party to the proposed transaction could simply choose not to pursue the deal at any time before the execution of the definitive documents due to unfavourable terms or for whatever reasons. If this is the case, it begs the question as to why most transactions will still have a term sheet in addition to a definitive agreement?

As mentioned above, it is to ensure that when the definitive agreements are being drafted, there will not be disagreements between the parties and having the parties to agree to most of the terms in a term sheet can prevent time from being wasted and additional cost from being incurred to draft the definitive documents. It should also be noted that a term sheet may also be binding if the parties to the proposed transaction consents and intends for it to be. For that reason, it is absolutely crucial not to assume that a term sheet is non-binding and to consult a lawyer/solicitor to help you vet the said term sheet before signing.

What Are the Salient Points in a Term Sheet?

Salient points to be included in a term sheet in a transaction typically are, amongst others:

  1. Subject Matter
  • Whether it is a merger or an acquisition.
  1. Parties
  • All parties to the proposed transaction i.e. investor/buyer and the seller of the company in question.
  1. Definitive Agreements
  • Such as the SSA or SHA.
  1. Conditions Precedent
  • The fulfilment of certain conditions for the legal/definitive agreements to be executed.
  1. Waiver of Conditions Precedent
  • This is crucial to include in any event one party would like to exercise its discretion to waive any condition precedent set out to which the other party has to fulfil.
  1. Consideration
  • Amount, mode of payment, escrow payment (if any) and time for payment.
  1. Board Composition
  • Whether the potential investor/buyer would be nominating any of its personnel into the board of the directors of the company in question to govern, manage and strategize.
  1. Confidentiality
  • To ensure that there is no disclosure of any information received/obtained as a result of entering into or performing of this term sheet.
  1. Drag-Along and/or Tag-Along
  • These are important clauses to be included in any shareholders’ agreement to allow the majority shareholder of the company to make the minority shareholder to sell their shares/ minority to sell their shares for the same price and terms and conditions as the majority shareholder in the event of any sale by the majority shareholder.
  1. Pre-Emption Right, also known as First Right of Refusal
  • The right to grant the existing shareholder the right to accept/decline an offer to buy the shares any shareholder intends to dispose before offering to any third party.
  1. Governing Law
  • Such as the Laws of Malaysia or other choice of jurisdiction of the parties.
  1. No-Shop, also known as Exclusivity Clause
  • This protects the investor’s interest as it precludes the seller from soliciting purchase proposals from other third party for a period of time.
  1. Deadlock Events
  • What the parties have to undertake in the event of any deadlock.
  1. Costs and Expenses
  • Who will bear the cost in connection with the negotiation, preparation, completion and/or termination of this Agreement (i.e. solicitor, accountants and stamp duty) and all matters which it contemplates.
  1. Legal Effect
  • Whether the parties intend for the term sheet to be binding.

These key points would then be formalised by way of the execution of SSA and SHA (if any) between the parties.

Frequently Asked Questions

  1. I have other concerns in relation to the potential acquisition of my company. Can it be addressed in the term sheet and/or the SSA?


The article above is by no means exhaustive and there is no one size fits all template/agreement. Feel free to consult us to have a tailor-made agreement to your specific needs.

  1. How do you resolve conflict and/or differences between the parties to a potential M&A transaction? Is it mandatory to obtain legal advice or representation?


Most of the time, the parties may be able to address their concerns by way of negotiations. However, to prevent the possibility to which the subject matter cannot arrive in unanimity by all parties after endless rounds of negotiations with the risk that the deal may fall through, we would highly advise for all parties in question to engage lawyer/solicitor to ensure that the deal runs smoothly and consummated in compliance with the applicable laws in Malaysia.

  1. I would like to enter negotiations with a potential buyer, but I am afraid that my company’s clientele and data would be leaked in the event the negotiations were to fall through. What can I do?


This is a common concern by most parties before the commencement of negotiations with a potential investor/buyer. We will be covering this topic in our subsequent article so, please keep an eye. Alternatively, you may consult us to understand the possible solutions for this situation.

As mentioned, this article is by no means exhaustive, and this does not constitute legal advice. Reach out to us at, if you have any queries.