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Business Law: Letters of Intents v. Term Sheets

A letter of intent is used in many types of businesses to list the terms of a proposed deal between prospective parties. While the letter of intent is usually signed by both parties, it contains language stating that this letter does not create a binding obligation on either party. Despite this fact, there has been a great deal of litigation arising from letters of intent when negotiations fall through. For example, in 1985 a jury awarded $10.5 billion in damages against Texaco for interfering with an agreement between Pennzoil and Getty Oil. This agreement was only in principle subject to a final agreement. This judgment resulted in Texaco filing for bankruptcy.

A better option for parties who want to write down proposed terms for a deal is a term sheet. The term sheet is an unsigned document and contains the details that the letter of intent would have about the proposed deal, which without the signatures creates lower chance of litigation if the deal does not happen.

In the food and agriculture fields, term sheets can be used in a multitude of ways, including gathering investors, sale of products to retailers, purchase of materials and resources, sale of business, and acquisition of other businesses and its assets. Regardless of the reason for the term sheet, it should include the following information:
• The description of the transaction
• Information of all parties involved
• Particulars of the deal
• Proposed economic details, such as price and payment
• Conditions upon which deal will occur, such as requirement of a security deposit or pre-payment
• Language stating that this is an outline, does not constitute an agreement or create any obligations on either party, and that all parties can renegotiate any provisions set out or terminate negotiations for any reason whatsoever

For transactions where the food or agriculture business is looking to acquire another business and its assets, it is also important to include, which assets will be purchased along with acquiring of the other business.

For businesses using terms sheets to attract investors, they should be sure to include information regarding the goals of the business, how they hope to achieve those goals, and details of the equity that the investor will receive.

Be sure to consult with an attorney when drafting term sheets to ensure that it does not include language that will create a binding obligation on the party of any party.

"This blog is for informational purposes only and is not intended to create an attorney-client relationship. It is recommended that you speak to an attorney licensed in your jurisdiction before relying on the information in this blog."

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