What is the difference between Heads of Terms (HoTs) and the Share Purchase Agreement (SPA)?

Andy Denny

Heads of Terms

The Heads of Terms (HoT) is the ‘roadmap’ document for a transaction, agreed between buyer and seller. It typically runs to 8-10 pages, depending on the complexity of the transaction. It is an important document, as it sets out the main terms of the agreement between parties. While it is not legally binding (other than in respect of confidentiality, jurisdiction and exclusivity), it is fundamental to the drafting of the more complex legally binding Share Purchase Agreement (SPA). Therefore, the more detailed the HoT document is, the better position you will start from with the SPA.

Your buyer is typically still competing with other interested parties at the time your advisor manages the preparation of HoTs. Therefore, the commercial terms and protection that can be achieved are greater than if left to be negotiated as part of the SPA. By the SPA stage, your buyer knows that they are in an exclusivity period, and therefore less likely to compromise further.

Share Purchase Agreement

The SPA is the main contract under which the shares in a business legally transfer to the buyer. All aspects of the transaction are addressed in this agreement, including price and structure, completion accounts schedules, earn out statements, risk allocation and liability caps, warranty claims procedures, restrictive covenants and warranties.

This document is typically 100+ pages long and contains significant elements that are heavily negotiated by both buy-side and sell-side lawyers over several weeks. Your lawyer will explain the main purpose of this document is to ensure an acceptable level of risk apportionment between buyer and seller.

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