In bilateral transactions (as opposed to auctions with several bidders), it is customary to prepare a letter of intent or term sheet setting out the main parameters of the transaction. Such preliminary documents are typically only binding to a limited extent (e.g., confidentiality, exclusivity, choice of law and jurisdiction). The negotiations and any preliminary documents entered into trigger pre-contractual obligations of the parties. Pre-contractual obligations may, in particular, become relevant in the case of breaches of exclusivity or the abandonment of negotiations. A seller that pretends to have an interest in selling to a buyer or breaches its exclusivity undertaking may become liable for that buyer's expenses incurred up until that point (due diligence, etc.) if the sale to the buyer ultimately does not take place. This may apply even if the parties have signed a nonbinding letter of intent, term sheet, memorandum of understanding or similar pre-agreement. However, it is usually difficult for a buyer to prove that the seller breached its pre-contractual obligations to negotiate in good faith. Therefore, buyers have an interest in requesting a breakup fee or liquidated damages in the letter of intent, in particular if the letter of intent provides for exclusivity.

• Exclusivity: Exclusivity of negotiations is one of the provisions typically covered in term sheets and letters of intent.
• Break fee: Breakup fees are not very common, but they are sometimes agreed upon, particularly in the event that a party will need to incur significant costs to progress negotiations up to the point of entering into a transaction.
• Confidentiality: Confidentiality is one of the provisions typically covered in term sheets and letters of intent unless confidentiality has already been agreed in a separate confidentiality agreement (NDA).

Separate confidentiality agreements or nondisclosure agreements are very common. Typically, a confidentiality agreement is entered into at the outset and then, at a later stage, the term sheet or letter of intent makes reference to the initial confidentiality agreement already in place.

Under German law, there is a general pre-contractual duty to negotiate in good faith. Accordingly, each party may become liable vis-à-vis the other party for damages caused by a breach of their pre-contractual duties.

Such pre-contractual duties include quite far-reaching information and disclosure duties on the part of the seller. In an M&A transaction, sellers are generally obliged to inform buyers of all material issues and circumstances that they are aware of, if such issues and circumstances can generally, and from an objective perspective, be regarded as relevant to a buyer's purchase decision. An even more far-reaching disclosure duty applies if a buyer asks the seller specific questions (e.g., in the due diligence process). If a seller's disclosure duty is breached intentionally during the negotiations, the buyer may be entitled to claim damages from the seller over and above any damages or limitations of liability provided for in the purchase agreement. This is because it is generally not possible to limit or cap a party's liability for intentional behavior. Further, if the nondisclosure constitutes fraud on the part of the seller, the buyer may be entitled to rescind the purchase agreement.