Is it customary to prepare a letter of intent or term sheet and, if so, to what extent are they binding on both parties?
In Japan, it is common for the buyer and the seller to prepare a letter of intent or term sheet before negotiating the definitive acquisition agreement. Except for certain matters, such as confidentiality, exclusivity, expense and similar provisions specifically identified as being binding, such preliminary documents prepared before the definitive agreement are typically not legally binding between the parties.
Does a term sheet, in this context, customarily include provisions on exclusivity, break fee or confidentiality?
- Exclusivity: Exclusivity provisions are common.
- Break fee: Break fees are not yet common, but if included, they are generally enforceable if the amount of the fees is reasonable regarding the costs and damage to the parties.
- Confidentiality: Confidentiality provisions are common.
Are exclusivity, break fee and confidentiality provisions supplemented with separately negotiated agreements?
Confidentiality letters and non-disclosure agreements are commonly used. However, separate exclusivity agreements are less common, as exclusivity is typically dealt with in the term sheet or preliminary agreement. Break fees are not commonly used in private acquisitions.
Is there a duty or obligation to negotiate in good faith?
Broad duties to act in good faith apply to the parties. Accordingly, any failure to reach a definitive agreement caused by bad faith behavior could create legal liabilities, although Japanese courts will make such determination on totality of facts and on a case-by-case basis.