Do I Have A Contract? Preliminary Agreements In Acquisitions

Published date07 January 2021
subjectMatterCorporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Contracts and Commercial Law, Shareholders
Law FirmMahWengKwai & Associates
AuthorMs Cassandra Nicole Thomazios and Celinne Teh

You have entered into a preliminary agreement with another party for an agreed purchase price to acquire a target company pending execution of a definitive agreement. Due to certain circumstances, you now find yourself unable to come up with the agreed purchase price to complete the transaction. Months have lapsed since the preliminary agreement and you think, "Well, maybe the other party has forgotten about our deal". Suddenly, they inform you that they are in the midst of executing the definitive agreement based on the initial agreed terms, and have requested for the purchase price to be paid upon execution of the definitive agreement.

This article seeks to discuss what you should first determine: Is your preliminary agreement a valid and binding contract?

What is a contract?

Section 10 of the Contracts Act 1950 states that a contract is a consensual agreement which is made by parties who are competent to contract for lawful consideration. A valid and binding contract must have, amongst others, the following basic elements:

  • Offer - Where a party proposes or conveys to another person his offer to do or abstain from doing an act for some consideration in return.
  • Acceptance - Where a party conveys his assent to the offer and agrees to the conditions stipulated.
  • Consideration - The subject matter of the agreement shall be fulfilled by both parties, which has to be legally executable and this is usually in the form of money.

In addition to the above, a valid and binding contract requires other ingredients, namely, an intention to create legal relations, certainty of terms and capacity to enter into an agreement.

What is a preliminary agreement?

A preliminary agreement is a non-binding document which lays out the framework, proposed terms, and conditions in which the parties are to enter. This document is usually an indication that negotiations have been initiated by the parties and/or that parties are in the final stage of contemplation before the execution of a definitive agreement.

Depending on the subject matter of the agreement, preliminary agreements may be in various forms, including a term sheet, Memorandum of Understanding ("MoU"), Memorandum of Agreement ("MoA") or Letter of Intent ("LOI"). MOU, MOA and LOIs have been used interchangeably in practice. Other forms of preliminary agreements in an acquisition transaction include exclusivity agreements. The purpose of entering into exclusivity agreements is to prohibit sellers from negotiating with third parties to sell or otherwise deal with the subject matter of the sale for a prescribed period of time. Such an arrangement may also be included as part of a term sheet, MoU, MoA or LOI.

How is a preliminary agreement identified?

Preliminary agreements generally use words and have clauses which indicate that it is not...

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