Company acquisitions sometimes start with a non-binding document to align on key intentions before due diligence and contract drafting.
This non-binding document is known as a Memorandum of Understanding (MOU) and it plays a vital role in laying the foundations for a formal contract like a Share Sale Agreement.
Below, we cover essentials of drafting an MOU for company acquisitions, including key clauses and details on legal enforceability.
Let’s begin.
Overview of MOU for company acquisition
An MOU for company acquisition is a preliminary document that captures the commercial understanding between a prospective buyer and seller, including:
- the target company’s details and ownership structure
- the intended acquisition method (e.g. share acquisition)
- indicative pricing or valuation approach, and
- percentage of stake to be acquired
Although MOUs are typically non-binding, they help ensure both parties agree on the big-picture deal before incurring due diligence and legal drafting costs.
When to use an MOU in acquisitions
An MOU is especially useful in early-stage mergers and acquisitions (M&A) when both parties are interested in exploring a potential deal but are not ready to enter into a full binding agreement.
It is appropriate when the parties want to:
- record their intention to explore a deal without committing to buy or sell yet
- start due diligence before a binding offer is made
- support internal decision-making or obtain regulatory or board approvals, or
- signal serious intent to external stakeholders, such as investors or the market
Key clauses
A well-drafted MOU should strike a balance between clarity and flexibility, providing enough detail to guide negotiations, while leaving room for further due diligence and deal structuring.
Below are common elements:
| Key Clause | Function |
| Parties | Identify buyer and seller |
| Target Company | Name, incorporation details, and business summary |
| Deal Structure | Share purchase or asset acquisition or full or partial stake |
| Indicative Pricing | Proposed value, pricing formula, or negotiation range |
| Due Diligence | Scope, timeline, and buyer access to records |
| Exclusivity Period | Will the seller refrain from speaking with other buyers for a period? |
| Confidentiality | Mutually binding obligations to protect sensitive company information |
| Conditions Precedent | What needs to happen before a binding agreement can be signed |
| Legal Effect Clause | Specify whether the MOU is binding or non-binding (in full or in part) |
| Timeline | Key dates for due diligence, negotiations, and signing |
3 common mistakes avoid
Although it is a relatively simpler pre-deal document, an MOU with key issues missing can create confusion, and below are common pitfalls:
- not specifying exclusivity terms, resulting in the seller contacting multiple buyers at the same time and potentially disrupting negotiations
- no timeline for due diligence or moving to the binding agreement
- unclear boundaries between binding and non-binding clauses
All three result in potential disputes due to assumptions and uncertainty.
MOU vs Share Sale Agreement
| Feature | MOU | Share Sale Agreement |
| Legal Status | Usually non-binding (except for specific clauses) | Binding and enforceable |
| Purpose | Record preliminary understanding and intent | Execute transfer of shares / ownership rights |
| Scope | High-level terms | Detailed obligations with specific terms |
| Risk | Minimal legal exposure | Higher legal risk due to enforceability |
| Timing | Typically signed before due diligence or share sale negotiation begins | Final stage document after due diligence and negotiations |
Conclusion
An MOU can be a valuable strategic step in a company acquisition.
While it does not replace a Share Sale Agreement, it plays an important role in surfacing key deal issues and setting expectations before parties incur the full cost of legal drafting or due diligence.
We can help you draft or review a clear, commercially sound MOU that protects your position, whether you are buying, selling, or negotiating key terms.
