Are Term Sheets Enforceable?

Term sheets, like letters of intent, are not intended by their own terms to be enforceable. Rather, they are a roadmap to point out important areas of agreement between the parties as they move from handshake to definitive agreements. In part, this is because the term sheet lays out the critical terms of agreement for a series of subsequent definitive agreements, including the certificate of incorporation, the stock purchase agreement, and the investor rights agreement, among others. Investors and the entrepreneur must negotiate and draft each of these subsequent agreements. In the case of the certificate of incorporation, amendments must be recommended by the board and adopted by the shareholders of the start-up. This requires the assent of parties who might not be at the table when new series investors are at the table with entrepreneurs. 

The following case deals with a dispute over a preliminary agreement (letter of intent in a merger) where the parties were unable to reach accord on definitive agreements. The question for the court is whether a party to a term shee faces potential liability for failing to negotiate in good faith to reach an agreement. Secondarily, to the extent a jilted party seeks damages what level of damages for failing to negotiate in good faith is available.