Amit Shekhar , Isha Agrawal
January 5, 2024
A term sheet is a legal document that outlines the terms of an investment between investor(s) and the investee company and acts as a guideline for the parties to understand the structure of a transaction and the terms and conditions encompassing the same. In a private equity/venture capital investment or a merger and acquisition transaction, a term sheet is usually signed between the investor(s), the promoter(s) and the investee company.
An important aspect of a term sheet is that it lays down the foundation for the preparation of definitive agreements such as shareholders’ agreement, share purchase agreement, share subscription agreement, business transfer agreement or an asset purchase agreement, as the case may be (referred to as “Definitive Documents”). A term sheet is signed once the parties agree to the terms of an investment, before the execution of the Definitive Documents.
One of the fundamental aspects in an investment transaction is to ascertain whether a term sheet is intended to be binding or non-binding on the parties.
The most common practice while carrying out investments is executing non-binding term sheets. Parties incorporate express language to indicate that a term sheet would not be binding between them, as it provides the parties with the flexibility to modify the terms captured under the term sheet until the execution of Definitive Documents. At the same time, an exception may be created, for clauses like confidentiality, exclusivity, term and termination, governing law and dispute resolution, which can be binding on the parties.
In the case of Gas Authority of India Limited vs. Sravanthi, the parties concerned signed a term sheet for supply of natural gas but failed to later convert the term sheet into a more detailed gas sale agreement. The Electricity Appellate Tribunal had to determine whether the term sheet was binding and could form the basis of restrictive trade practices on part of Gas Authority of India Limited (GAIL). While the court of first instance found that the term sheet was binding, the Appellate Tribunal disagreed with this finding, because the term sheet provided that none of the rights or obligations set out therein shall become effective until the date known as conditions precedent ‘Satisfaction Date’. In the Tribunal’s understanding, since the obligations stemming from the term sheet were subject to the performance of the conditions precedent, and those conditions precedent were not performed, the term sheet was not binding. This was held despite the term sheet explicitly providing that it was binding.
A binding term sheet
implies that all the clauses and provisions therein would be binding between
the parties. From an enforceability perspective, it has more teeth. Therefore,
any Definitive Documents in the future should have provisions that clearly and
explicitly override this document.
In M/s. Best on Health Limited and
others v. M/s. Bestech India Private Limited,
it was held that the contention of the respondents
that the term sheet is not a binding contract is incorrect. Various
courts including the Supreme Court have observed in a catena of judgments that
a term sheet is a binding contract.
International FZE Ltd. vs Vedanta Aluminium,
the Supreme Court has held that mere fact that a formal contract is yet to be
prepared and initiated by parties, would not affect their acceptance of
contract or its implementation, even if formal contract has never been
So, it can be concluded that the
binding nature of a term sheet depends on a case-to-case basis whether the intent
of the parties is to construe the term sheet to be binding or non-binding. In
practice however, entering into a non-binding term sheet provides the parties
with the flexibility to amend, revise and revisit the provisions at the time of
formulating the Definitive Documents.
Following are some material and key clauses generally agreed to between the investor(s), promoters and the investee company regarding the terms and conditions of a transaction:
A term sheet therefore is a legal document that outlines the nature and structure of an investment or an acquisition transaction upon negotiations amongst the parties and their respective counsels. It forms an agreed premise and stipulates guidelines to prepare the Definitive Documents.
 (27.10.2021 - APTEL):
 2014 SCC OnLine P&H
 (2010) 3 SCC 1
 AIR 1992 SC 453
 RFA 247/2004
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