Delaware Law Alert: Long Live the Term Sheet—When Term Sheet Provisions Survive the Execution of Definitive Agreements

Deal parties may be surprised to learn that a term sheet signed as part of early negotiations can, in some circumstances, continue to be binding after the execution of a definitive transaction agreement contemplated by the term sheet. This is true even when the definitive agreement includes an integration clause, and Delaware case law offers several examples where a party successfully asserted rights found only in a previously executed term sheet. This Legal Update reviews recent Delaware opinions and offers guidance on how parties can avoid surprises from old term sheets through clear and unambiguous drafting at both the term sheet stage and in definitive documentation that is intended to fully supersede a previously executed term sheet.

Background

Term Sheets: Parties to a proposed transaction often use a term sheet in the early stages of negotiation to agree to key deal terms at a high level before committing additional time and resources to due diligence and the negotiation of definitive documents. The terms outlined in a term sheet are typically intended to be non-binding and for discussion purposes, without committing the parties to enter into a transaction. However, in some cases, parties may agree that specific provisions in the term sheet are binding. These are often ancillary terms relating to confidentiality, exclusivity, choice of law, and treatment of expenses. In some cases, parties might agree to binding provisions that have a more substantive effect on the transaction; we discuss examples of these below.

Superseding Definitive Agreements: In most cases, a term sheet serves a limited purpose and is replaced by a definitive agreement (or set of agreements) that incorporates the full set of deal terms. With a definitive agreement in place, parties may believe that the binding provisions of the term sheet are no longer in force. However, under Delaware Law, a definitive agreement does not supersede the binding provisions of a term sheet unless one of the following is true:

• The provisions of the definitive agreement contradict the binding provisions of the term sheet, in which case the term sheet will be superseded only to the extent of those contradictions.

• The parties expressly agree that the term sheet is no longer binding. Often, a definitive agreement will accomplish this by including an integration clause (sometimes referred to as a “merger” or “entire agreement” clause). A standard integration clause states that the definitive agreement supersedes all other agreements between the parties with respect to its subject matter. An integration clause creates a presumption that there are no additional terms outside of the agreement (including a term sheet) that will change the terms of the agreement. However, like any other contractual provision, integration clauses are interpreted according to their plain meaning, and the presumption of integration may be rebutted with evidence (including contractual terms and the parties’ course of dealing) that show an intention for the term sheet to remain in force alongside the definitive agreement.

Examples of Surviving Term Sheet Provisions: Numerous Delaware Chancery Court opinions illustrate situations where the binding provisions of a term sheet were found to remain in force and not superseded by a later definitive agreement.

• Case 1 - A term sheet covering multiple transactions: In one opinion,¹ a small asset management firm partnered with a well-established seed investor to make investments in a series of companies. The parties signed a term sheet that included binding provisions pursuant to which the seed investor, if it chose to join proposed investments, would receive an equity interest in the asset management firm and a share of management fees for each investment. Over the course of their relationship, the parties appeared to rely on these provisions, including at various points where the asset management firm proposed revising the terms and confirmed to its auditor that the seed investor held an equity interest in the firm.
  
  After identifying investment targets, the parties formed a limited liability company (LLC) governed by an operating agreement specific to each target. Each operating agreement described the split of ownership interests and investment proceeds, and included a standard integration clause.
  
  When one investment achieved a liquidity event, the seed investor asserted its rights under the term sheet to an equity interest in the asset management firm and a share of the management fees. The asset management firm argued that the term sheet had been superseded by the operating agreement.
  
  The court disagreed, holding that the term sheet had not been superseded for multiple reasons:

(1) It held that the plain language of the operating agreement’s integration clause only superseded prior agreements that covered the same subject matter as the operating agreement. The subject matter of the operating agreement was limited to the parties’ investment in one of many targets. In contrast, the term sheet addressed the parties’ overarching business deal across several investments, and was therefore beyond the more narrow subject matter of the operating agreement.

(2) The asset management firm’s course of dealing demonstrated that it relied on the term sheet. In fact, the court noted it would be an “absurd result” for the operating agreement to supersede the term sheet because the term sheet’s provisions formed the basis of the ongoing investment relationship and the firm’s access to capital from the seed investor. The court refused to enforce an interpretation of the integration clause that “produces an absurd result or one that no reasonable person would have accepted when entering [into] the contract.

Accordingly, the court held that the term sheet remained in force alongside the operating agreement, entitling the seed investor to an interest in the asset management firm and a share of the management fees.

• Case 2 – A definitive agreement with an affiliate: In another opinion,² a private equity firm and an investor signed a term sheet with respect to the acquisition of a target company. The term sheet included a binding provision that the target company would reimburse the private equity firm for all expenses incurred in connection with the acquisition.
  
  After closing the acquisition, the acquired company was held through an LLC, which was majority owned by an affiliate of the investor, with the private equity firm and other investors holding smaller interests. The LLC agreement included governance rights and a standard integration clause but was silent on any reimbursement to the private equity firm. When the target company failed to reimburse the private equity firm, the firm sued, alleging that the investor had breached the term sheet by failing to use its control of the LLC to cause the acquired company to pay the reimbursement.
  
  The court held that the term sheet remained in force and was not superseded by the LLC agreement for one reason: Although the investor was a party to the term sheet, it was not a party to the LLC agreement. By the terms of its integration clause, the LLC agreement superseded only prior agreements between the parties to the LLC agreement. The court concluded that the parties were different because, although the investor was a party to the term sheet, one of its affiliates (and not the investor itself) was a party to the LLC agreement.

• Case 3 – A term sheet with unique provisions: In another opinion,³ an investor planned to invest in an LLC and signed a term sheet with the LLC and its four members. The term sheet included a binding provision titled, “Exclusivity; Restriction on Business,” pursuant to which the target company agreed that, for 12 months, neither the LLC nor its members would take certain actions without the prior written consent of the investor. The parties entered into an amended LLC agreement signed by the LLC itself, the four members, and the investor as a new member. The LLC agreement included a standard integration clause.
  
  The LLC later attempted to sell substantially all of its assets without the approval of the investor. The investor argued that (in addition to certain rights under the LLC agreement) the exclusivity provision of the term sheet required the LLC to obtain the investor’s prior written consent for the sale. The LLC countered by arguing that the term sheet had been superseded by the LLC agreement. The court held that the exclusivity provision of the term sheet remained in force because:⁴

(1) The two agreements addressed different subject matters. The term sheet addressed the investor’s relationship with the LLC as an outside investor, while the LLC agreement governed the internal affairs of the LLC and its members. Most importantly for the court, while the LLC agreement included some provisions from the term sheet, it excluded other binding provisions, including the term sheet’s exclusivity/consent provision. Since the investor’s rights under the term sheet’s exclusivity provision did not appear in the LLC agreement, they were outside the scope of the LLC agreement’s subject matter and, therefore, not superseded by it.

(2) The term sheet and the LLC agreement involved different parties. The term sheet was signed by the investor (when it was not yet a member of the LLC), the LLC, and the four members of the LLC at that time. Although these same parties signed the LLC agreement, the court noted that the parties to the LLC agreement remained in flux: three new members were later added to the LLC agreement. For the court, this made clear that the term sheet applied to the investor as an outside investor, while the LLC agreement applied to the investor in its more narrow capacity as one of the members of the LLC.

Practical Considerations

These opinions demonstrate that binding provisions of term sheets may not terminate upon the execution of a definitive agreement and that parties must carefully account for them as part of the transaction. Below are some takeaways to keep in mind.

• Factors Causing Term Sheets to Survive: Deal parties should be attentive to the following circumstances where it is more likely that the binding provisions of a previously executed term sheet may survive alongside the definitive agreement:
  • The purpose or subject matter of the term sheet differs from that of the definitive agreement. The subject matter of the term sheet and the definitive agreement are perhaps most obviously different when the term sheet contemplates multiple transactions, and the definitive agreement applies to a single transaction or a component of the transaction.
    
    Parties should also take care when the definitive agreement is an LLC agreement or other governance document (such as a stockholders agreement or investor rights agreement) that has the narrow purpose of defining the parties’ rights as equityholders in an entity. In those cases, a term sheet is more likely to be viewed as an expression of a wider relationship between the parties beyond the limited scope of the governance documents.
  • The term sheet has binding provisions not included in the definitive agreement. Delaware courts are reluctant to terminate substantive term sheet provisions that can significantly impact the transaction absent language in the definitive agreement that expressly supersedes or terminates them.
  • The parties to the term sheet differ from the parties to the definitive agreement. While it seems logical that an agreement between party A and party B should not be assumed to supersede an agreement between party A and party C, it is notable that, in Case 2, above the court refused to look beyond corporate formalities in holding that a term sheet between party A and party B was not superseded by the definitive agreement involving party B’s affiliate. Because it is not uncommon for parties to form transaction-specific affiliates to enter into the definitive agreement, if the parties desire to ensure that the provisions of a binding term sheet are no longer in effect, they should consider having the specific parties to the term sheet execute a termination agreement.
  • The course of dealing of the parties indicates they intended for the term sheet to remain in effect. Evidence of such a course of dealing can include actions in compliance with the term sheet provisions, communications referencing the provisions, amending or expressing a desire to amend the provisions, and communications to third parties (such as auditors) about the provisions. Particularly, as noted in Case 1 above, if the term sheet provisions play a fundamental role in the transaction such that it would be “absurd” or unreasonable for the parties to have understood them to be superseded, those provisions are likely to remain in force.

• Express Termination of Term Sheets: If parties want to ensure that a term sheet is superseded upon entry into a definitive agreement, they should consider the following:
  • In the integration clause of the definitive agreement, expressly state that the term sheet has been superseded and is no longer in effect. For example:

  This Agreement constitutes the entire agreement between the parties hereto concerning the subject matter hereof and supersedes any prior understanding, correspondence, email, term sheet, offer letter, letter of intent, agreement or arrangement, whether written or oral, among the parties and their respective affiliates with respect to such subject matter (the “Prior Agreements”). For the avoidance of doubt, all Prior Agreements (including without limitation the term sheet executed by the parties hereto on [date]) are hereby null and void and deemed to be replaced and superseded in their entirety by this Agreement.
  
  

  • Include a provision in the term sheet causing it to terminate upon entry into the definitive agreement or other circumstances. For example:

  This Term Sheet shall terminate automatically and be of no further force and effect upon the earlier to occur of (i) the execution and delivery of a [definitive agreement], or (ii) the mutual written consent of the parties hereto.
  
  

  • While these examples terminate the term sheet in its entirety, there may be circumstances where parties desire for certain binding provisions to remain in force, such as confidentiality obligations. In such cases, the parties should either incorporate the provisions into the definitive agreement or draft the integration clause as clearly as possible to define which provisions do and do not survive.

• Appropriate Scope of Term Sheets: Parties should be thoughtful about their use of term sheets. In many cases, term sheets are helpful tools to agree on high-level deal points in the early stages of negotiations, but they may not be the ideal place to include substantive provisions about an ongoing investment relationship or about rights and obligations that may continue after a definitive agreement is signed. Parties should consider addressing such substantive provisions in the definitive agreement or, if the parties anticipate a series of related transactions, the terms should be incorporated into a framework agreement applicable to the series of transactions.

• Beyond Term Sheets: The Delaware opinions discussed in this update involve term sheets, but their reasoning applies equally to other preliminary agreements, including letters of intent, memoranda of understanding, and confidentiality agreements. When preparing any definitive agreement, counsel should consider identifying and addressing all such preliminary agreements.

¹ Finger Lakes Capital Partners, LLC v. Honeoye Lake Acquisition, LLC, C.A. No. 9742-VCL (Del. Ch. October 26, 2015) (Laster, V.C.) (post-trial memorandum opinion), affirmed in relevant part, No. 42, 2016, 151 A.3d 450 (Del. 2016).

² Tygon Peak Capital Management, LLC v. Mobile Investments Investco, LLC, C.A. No. 2019-0847-MTZ (Del. Ch. January 4, 2022) (Zurn, V.C.) (memorandum opinion regarding motion to dismiss).

³ RE: Techno-X USA. Inc. v. Spartan Forge. LLC, C.A. No. 2024-1313-LWW (Del. Ch. June 9, 2025) (Will, V.C.) (letter opinion regarding cross-motions for summary judgment).

⁴ The term sheet was governed by the laws of the Province of Québec, Canada. The court declined to definitively resolve the effect of the term sheet’s provisions under those laws. Instead, the court focused its analysis on the LLC agreement, which was governed by Delaware law, and the effect of its integration clause on the term sheet.