When is a term sheet legally binding? Commercial Court guidance on term sheets and misrepresentation

A recent Commercial Court decision provides important guidance for corporate disputes, confirming when term sheets can be legally binding and how warranties and disclosures may give rise to misrepresentation claims.

In Hoffman & Anor v Finalto Group Limited & Anor [2026] EWHC 921 (Comm), the court held that an equity term sheet can create binding obligations, even where further documentation is anticipated. It also confirmed that statements in contractual warranties and disclosures may, in principle, amount to actionable misrepresentations.

This article explores the judgment and its implications for the enforceability of term sheets and the treatment of warranties and disclosures in corporate transactions.

What happened in Hoffman v Finalto Group Ltd?

The case concerns claims brought by the CEO and COO of Finalto Group Limited ("FGL") (the "Claimants") for non-payment of sums which they said were due to them from Gopher Investments ("GI") following GI's acquisition of FGL from Playtech PLC ("Playtech").

Playtech and GI entered into a share purchase agreement on 29 September 2021 (the "SPA").

The parties also entered into the following agreements alongside the SPA: (i) an escrow agreement pursuant to which GI agreed to pay a USD 10 million deposit into an escrow account; (ii) an equity term sheet (the "ETS") stated to be made between GI and "the Managers", the definition of which included the Claimants; (iii) a management warranty deed (the "MWD") under which the Claimants gave warranties to GI and an accompanying disclosure letter from the Claimants to GI (the "Disclosure Letter"); and (iv) a buyer side warranty and indemnity insurance policy in favour of GI.

The ETS provided for the Claimants to be given management equity in the holding company that would be set up to hold FGL following the acquisition, stating that the Claimants (amongst others) "will be invited to participate in the equity of a company set up as a direct or indirect holding company ("Holdco") of Finalto Group Limited (the "Target"). It alsoprovided that the terms set out in the ETS "will be reflected in an investment agreement relating to Holdco … (the "Investment Agreement")".

Completion under the SPA took place on 11 July 2022. However, GI never implemented the planned Holdco structure, never finalised the Investment Agreement, and never allocated equity to the Claimants. Whilst GI's solicitors did circulate a draft "Issues List" in respect of the draft Investment Agreement in September 2022, they were subsequently instructed to down tools, and the Investment Agreement was not agreed. In November 2022, the employments of both Claimants were terminated. The anticipated Holdco had not been incorporated and there had been no restructuring of the GI Group, and no equity in any such company had been allocated to the Claimants.

The parties' claims and arguments

The Claimants commenced proceedings against GI and FGL, claiming that GI breached its obligations under the ETS to procure the issue to each of the Claimants of certain percentages of various types of shares in the Holdco.

GI advanced the following main defences against the ETS related claims:

1. The ETS did not oblige GI to issue shares to the Claimants – the only unconditional obligation on GI was to "negotiate in good faith" the terms of "Definitive Documents" (as defined in the ETS). Whilst GI did negotiate in good faith, none of the Definitive Documents were executed.
2. In any event, any entitlements the Claimants might have had under the ETS were conditional upon a structure being agreed and implemented after the acquisition, and that did not happen.
3. Even if the Claimants did have claims under the ETS, those claims would have only nominal value, because after the Claimants' termination GI discovered that they had made fraudulent misrepresentations during the acquisition of FGL. As a result, the Claimants would have had to forfeit any equity under the terms of the ETS.

GI also brought counterclaims against the Claimants, for (i) alleged fraudulent misrepresentation in the MWD; (ii) damages for deceit; and damages for breach of the ETS. In particular, GI contended that the MWD and accompanying Disclosure Letter contained fraudulent false representations regarding various employment and other arrangements.

The Commercial Court's decision

The ETS claims

The Commercial Court concluded that there were binding obligations on GI under the ETS to arrange an appropriate corporate structure and to issue equity in the prescribed amounts to the Claimants.

The court came to this decision on the basis of the following analysis:

1. The nature of the document: the ETS contained detailed and lawyerly terms.
2. The structure of the document: the ETS contained a preamble, a table setting out the operative obligations, and a section dealing with implementation mechanics.
3. The legal effect provision: section 10.9 of the ETS provided that "this term sheet is legally binding on the parties, subject to a definitive agreement". The same provision also provided that the document could be executed in counterparts and that all matters arising from it would be governed by English law and the English courts would have exclusive jurisdiction to settle any disputes.
4. The parties' intentions: The stipulation that the ETS was legally binding was a strong indicator that it was intended that the key provisions in section 1.2 were intended to have legal effect and create rights and obligations capable of effective enforcement.
5. The obligatory language: there was obligatory language in centrally important provisions of the ETS, such as "the below terms and others will be reflected in an investment agreement relating to Holdco" and "the Lead Investor shall own ordinary shares in the capital of Holdco … on and following Completion". The first provision meant that GI was under an obligation to enter into an investment agreement, and as also set out in the ETS, that investment agreement was to incorporate the terms set out in the ETS. The second provision meant that GI had an obligation to implement a Holdco structure to take effect following completion, and this obligation was unconditional other than being conditional on Completion occurring.

Against that background, the court concluded that it would be unlikely and surprising that the parties would have intended that the ETS should have almost no legal effect except to impose an obligation to negotiate the Definitive Documents in good faith. Instead, the court found that the provision that the ETS was legally binding "subject to a definitive agreement" meant that the ETS was legally binding but would be superseded and replaced by a definitive agreement, not that the ETS would be binding only if a definitive agreement was subsequently concluded.

The court then found that GI was in repudiatory breach of the ETS, having instructed its solicitors to stop working on the Definitive Documents and denied that the ETS was legally binding.

The court also found that the allegations of misconduct against the Claimants by GI were not made out, which meant that these allegations did not impact the quantum to be awarded to the Claimants.

The fraudulent misrepresentation claims

The Commercial Court also decided against GI in relation to its counterclaim for fraudulent misrepresentation, finding that the relevant representations were not proved to be untrue or made fraudulently.

The Claimants had argued that they gave warranties only, and that these warranties in the MWD did not constitute pre-contractual representations. The court disagreed with this argument, finding that "it cannot be said that all the statements in the MWD and Disclosure Letter only have effect as warranties and not representations".

This is because:

1. The nature of a number of the statements was consistent with providing information that would be unlikely to be within the knowledge of the buyer.
2. The statements were contained in drafts of the documents which were seen before entry into the final deal documentation including the SPA, and the SPA was executed after the execution of the MWD and Disclosure Letter, supporting their treatment as representations.
3. The MWD and Disclosure Letter contained provisions that indicated that it was understood that statements within them could constitute representations. In particular, clause 17.2 confirmed the parties had not entered into the documents on the basis of any representation not expressly incorporated into the MWD – this in itself indicated the MWD could contain representations. Clause 17.3 meanwhile excluded liability for negligent and innocent misrepresentation made prior to and/or in the deed – which assumed there could be representations prior to or in it.
4. The Disclosure Letter stated that the management warrantors make no representation or warranty in relation to any disclosed matter or document which was not expressly given in the warranty deed – this envisaged the possibility that there may be representations given in the MWD.

However, despite finding that statements in the MWD and Disclosure Letter were capable of being representations, the court held that it was not established that the representations were untrue or made fraudulently. The court further held that even if misrepresentation had been established, the court would have rejected the defendants' case that the misrepresentations had been made fraudulently. This is because the court accepted the Claimants' evidence that the process of giving the representations was a careful one and they had undertaken a careful verification process, and believed that the result of that process was statements that were true and accurate.

What this decision means in practice

This decision provides useful guidance on two issues / areas of contention that can lead to disputes in a post-M&A context (but also more generally in the context of negotiating term sheets and documents which are associated with share purchase agreements): (i) whether a term sheet which envisages further future documentation can be binding in their own right if that documentation is not agreed; and (ii) whether statements made in warranties and disclosure letters can constitute misrepresentations.

Whilst parties may not consider an equity term sheet to be binding, particularly where further documentation is yet to be agreed, this decision shows that a court will consider such ancillary documents in the round, and if there are indications that the parties intended the document to be binding, the court will treat it accordingly.

This can result in parties being bound to agreements which don't contain the usual host of protections which would be expected in full-form documents (meaning that caution needs to be exercised when agreeing only the bare bones of a deal, but on a binding or potentially binding basis). It should however be noted that this judgment concerned an equity term sheet designed to lock in key personnel alongside the transaction – management were giving something up in exchange for the promise of future equity. In that context it can be seen that a court may be keen to find the terms were binding – but the analysis may not hold for general commercial term sheets.

Nonetheless, the decision highlights the importance of making negotiation expressly 'subject to contract', expressly making obligations conditional on execution of definitive documents, or carving out specific provisions as non-binding pending further negotiation.

Similarly, whilst parties may consider that warranties provided in management warranty deeds and accompanying disclosure letters should only be treated as warranties (with the consequences that brings in the event of breach), there is now increasingly authority that such statements can also be considered representations depending on the drafting and context, and can therefore give rise to a claim for fraudulent misrepresentation.

The court reached a similar conclusion last year in Veranova Bidco LP v Johnson Matthey PLC [2025] EWHC 707 (Comm) (albeit only on a summary judgment application), holding that draft disclosures in a disclosure letter might amount to actionable misrepresentations. Again, caution therefore needs to be exercised around liability to which a party may be exposed because they don't have the level of protection which they anticipate might be afforded by documentation otherwise drafted to exclude such issues.

The judgment reinforces that even early-stage documents can carry real legal risk if not clearly framed.

Read the original article on GowlingWLG.com