Acquisitions: enforceability of equity term sheet
- William Kanaan
- 9 hours ago
- 1 min read
The High Court held that an equity term sheet (ETS) created binding obligations to issue management equity, despite definitive documents never having been agreed.
The dispute arose from A's acquisition of D in 2022. The ETS was entered into in 2021, alongside other documents relating to the acquisition of D, including a share purchase agreement (SPA). The claimants (C), who were D's CEO and COO, claimed management equity entitlements under the ETS. A contended that the ETS only required it to negotiate definitive documents in good faith.
The ETS stated that it was legally binding on the parties, subject to a definitive agreement.
The court held that this meant that the ETS was binding but would be superseded by a definitive agreement, not that it would only become binding if a definitive agreement were concluded. The contrary interpretation would render the ETS non-binding, contradicting the purpose of a legal effect clause.
Obligatory language in key provisions of the ETS strengthened this conclusion, and the good faith negotiation obligation reinforced A's binding commitments. A repudiated the ETS by instructing its lawyers to cease work and subsequently denying that the ETS was binding.