A recent Commercial Court decision is a stark reminder that a "term sheet" can and often will be binding. In Hoffman & Anor v Finalto Group Ltd & Anor [2026] EWHC 921 (Comm), the court found that a preliminary equity term sheet entered into in connection with an M&A transaction created legally binding obligations even though the intended long-form documentation to formalise the equity arrangements never followed. In addition, the court determined that walking away from the follow-on documents could amount to repudiatory breach.

The takeaway message is simple: draft your preliminary transaction documents with precision.

The deal in plain English

The dispute arose from Gopher Investments' acquisition of Finalto, a financial services technology business. Before the acquisition, Mr Hoffman was Finalto's CEO and Mr Greenbaum was its COO.

The former CEO and COO had previously tried to organise a management buy-out, but Gopher later made a higher competing offer to acquire Finalto for US$250 million. The transaction documents included a share purchase agreement, management warranty deed, disclosure letter, a buyer-side warranty and indemnity insurance policy, and an equity term sheet.

The equity term sheet contemplated that management would participate in the equity of a new holding company structure after completion. Whilst the acquisition of Finalto completed in July 2022, the holding company structure was never implemented and the definitive investment documents were not finalised by completion.

After completion, relations deteriorated, negotiations on the equity documents stalled, and the CEO and COO were later dismissed. They claimed that the buyer had wrongly repudiated the equity term sheet and that they were entitled to sums due, or damages, in respect of the promised equity and their termination. The buyer argued the equity term sheet only became binding once the definitive agreement was signed.

What the court decided

The court applied established contractual interpretation principles and held that the clause within the equity term sheet stating that it was "legally binding on the parties, subject to a definitive agreement" created binding obligations despite definitive documents remaining to be agreed. The obligatory language elsewhere in the document also affirmed the binding nature of the document. The buyer was found to be in repudiatory breach, including by instructing lawyers to "down tools" and then terminating the claimants' service agreements.

Warranties & misrepresentations

The case also addressed whether warranties can be fraudulent representations. The buyer's counterclaim argued that statements in the management warranty deed amounted to fraudulent misrepresentations. Whilst the counterclaim failed (because the court was not satisfied that the relevant representations were false or fraudulent), the court's analysis is still important. The court emphasised that a contractual warranty is not itself an actionable representation merely because it appears in a contract, but the same factual statement may also amount to a representation where, viewed in context, it was communicated pre-contractually and relied on. Here, relevant factors included:

• that the warranties concerned present or past matters unlikely to be within the buyer's own knowledge;
• that the statements had been seen in draft before the SPA was signed; and
• that the wider transaction documents contemplated that representations could be made in the management warranty deed.

The drafting also mattered: the warranty deed addressed liability for innocent and negligent misrepresentation but did not exclude fraudulent misrepresentation, supporting the argument that representations could have been made.

Three lessons:

1. Always treat term sheets as potentially binding

Term sheets, heads of terms and letters of intent are often treated as 'pre-lawyer' documents, but the court's decision in this case confirms that careful drafting is required if the parties do not wish to create legally binding obligations. If the document says it is binding and uses obligatory language, a party cannot later treat it as merely intentional and a court will take that seriously. If the intention is that no party is bound until long-form documents are signed, the document needs to say so clearly and consistently.

2. Be clear on what's included in the term sheet 

In this case, the major issues arose from the inclusion of details on the post-completion structure and management equity investment, which the buyer argued were not intended to be binding until the definitive investment documents were completed. In founder exits, management buy-outs, growth investments and private equity-style deals it is incredibly common for management equity to be negotiated at an early stage and under time pressure. 

However, the lesson here for management teams and founders is that the term sheet must either be very clear that certain details included in the document are not binding or not include them at all. In addition, a management incentive plan should not be hastily pulled together or treated as a side letter to the "real" deal.

If the economics are critical, the term sheet should be carefully drafted to say clearly whether the relevant obligations are immediately binding or not, and the parties should in mind that the usage of the words "legally binding on the parties, subject to a definitive agreement" were enough for the obligations to be found binding in this case, even though the definitive agreement was never drafted.

3. Draft warranties and non-reliance clauses with care

The case is also a warning for sellers and/or management teams that depending on the wording and surrounding documents, factual warranties may also support misrepresentation claims, particularly where they are provided before the SPA and convey information the buyer does not otherwise know. 

If the intention is to exclude misrepresentation claims, the entire agreement and non-reliance wording needs to be properly tailored. Boilerplate may not be enough if the rest of the documents point in the opposite direction.

Final thought

The lesson from Hoffman v Finalto is not "never sign a term sheet". It is: know exactly which parts are intended to be binding at the outset (if any) and make that crystal clear in the drafting. For founders, the additional message is: carefully plan the intended management equity structure before committing it to paper and potentially creating legally binding obligations; do not make hasty promises leaving critical equity or warranty wording to be cleaned up later.