Is a Term Sheet Legally Binding in Korea? Key Clauses to Review Before Signing
When a startup receives a term sheet from an investor, it may be tempting to treat the document as a preliminary summary that can be signed before the definitive investment agreement is negotiated.
However, a term sheet is not necessarily non-binding simply because it is signed at a preliminary stage.
Depending on its wording and the parties’ intent, the entire document may be non-binding while certain provisions—such as confidentiality, exclusivity, obligations to execute a definitive agreement, or liability for breach—may have legal effect.
Before signing a term sheet, therefore, the key question is not simply what the document is called, but which terms have been agreed upon and which provisions are intended to create legally binding obligations.
1. What Is a Term Sheet?
A term sheet is a document used to outline the principal terms of a proposed investment before the parties enter into a definitive investment agreement.
It commonly addresses matters such as:
- Investment amount
- Company valuation
- Investment structure
- Type of shares or securities to be issued
- Key investor rights
- Conditions for proceeding with the investment
Korean law does not establish a separate statutory category specifically for a “term sheet.”
Accordingly, whether a document is titled a Term Sheet, Memorandum of Understanding (MOU), Letter of Intent (LOI), or preliminary agreement does not by itself determine its legal effect.
The Supreme Court of Korea has held that a contract does not require agreement on every conceivable matter, but there must at least be a sufficiently specific meeting of minds regarding its essential or material terms, or an agreed method by which those terms can later be determined. (Supreme Court of Korea, March 23, 2001, Case No. 2000Da51650)
2. Does Signing a Term Sheet Make It Legally Binding?
Not necessarily. Signing a term sheet does not automatically mean that the entire document has the same legal effect as a definitive investment agreement.
At the same time, a term sheet cannot automatically be treated as having no legal effect merely because it precedes the final agreement.
The central issue is the extent to which the parties intended to be legally bound by the terms contained in the document.
In a Supreme Court case involving an MOU for a corporate acquisition, the document expressly provided that it was legally binding and required the parties to execute a definitive agreement by a specified deadline.
The Court examined the actual obligations and provisions agreed upon by the parties rather than disregarding the document simply because it was labeled an MOU.(Supreme Court of Korea, July 14, 2016, Case No.) 2012Da65973
Accordingly, particular attention is required where a term sheet contains provisions concerning:
- A deadline to execute the definitive agreement
- Exclusive negotiations
- Confidentiality
- Deposits or other security for performance
- Liquidated damages or other consequences of breach
Each provision should be reviewed separately to determine whether it was intended to create a legally enforceable obligation.
3. Which Clauses Should Be Reviewed in a Term Sheet?
🔹Key Clauses to Review in a Term Sheet
| Clause | What It Covers | Key Question |
|---|---|---|
| Investment Terms | Amount, valuation, investment structure | Are the terms final? |
| Exclusivity | Restrictions on negotiations with other investors | What is the scope and duration? |
| Confidentiality | Protection of information exchanged during negotiations | What information is covered? |
| Definitive Agreement | Future execution of the investment agreement | Is execution mandatory? |
| Binding Effect | Obligations intended to be legally enforceable | Which provisions are binding? |
A term sheet may state that the document as a whole is non-binding while expressly providing that certain clauses, such as confidentiality or exclusivity, are legally binding.
Conversely, even where the document does not clearly state whether it is binding, its legal effect may still require consideration of its specific wording, the course of negotiations, and the parties’ intentions.
4. How Is a Term Sheet Different from an Investment Agreement?
A term sheet is generally used to identify and organize the principal commercial terms before a definitive agreement is executed.
A definitive investment agreement, by contrast, sets out the detailed rights and obligations governing the actual investment.
For example, a term sheet may provide that an investor will invest KRW 1 billion based on a particular company valuation.
The definitive investment agreement may then address additional matters such as:
- Type and number of shares to be issued
- Payment and closing date
- Conversion or redemption rights
- Investor consent rights
- Restrictions on share transfers
- Representations and warranties
- Events of default and remedies
A term sheet should therefore not be viewed merely as an informal summary. It may establish the framework for subsequent negotiations and materially affect the terms of the definitive investment agreement.
5. What Should You Check Before Signing a Term Sheet?
🔹Scope of Legally Binding Provisions
Determine whether the entire document is intended to be binding or whether only specific provisions—such as confidentiality or exclusivity—create enforceable obligations.
🔹Whether the Investment Terms Are Final
Check whether the valuation, investment amount, ownership percentage, and type of securities are final or remain subject to due diligence, investment committee approval, or further negotiation.
🔹Scope of Exclusivity
Where the company is restricted from negotiating with other investors for a specified period, the duration and scope of that restriction should be clearly reviewed.
For a startup actively raising capital, an overly broad exclusivity provision may significantly restrict other fundraising opportunities.
🔹Obligation to Execute the Definitive Agreement
There is an important distinction between an agreement to continue negotiations in good faith and an obligation to execute a definitive investment agreement by a specified date.
The Supreme Court case discussed above, Case No. 2012Da65973, involved an MOU that expressly imposed an obligation to execute the final agreement by a specific deadline.
🔹Liability if the Transaction Does Not Close
A term sheet may also contain provisions relating to deposits, transaction expenses, liquidated damages, or other consequences if the transaction is terminated.
Under Article 398 of the Korean Civil Act, parties may agree in advance on the amount of damages payable in the event of non-performance, and an agreed penalty is generally presumed to constitute liquidated damages.
Accordingly, term sheet review should address not only the proposed investment terms but also what obligations arise upon signing and what liability may remain if the investment does not proceed.
6. Can a Party Walk Away If the Term Sheet Is Non-Binding?
A non-binding term sheet does not necessarily mean that negotiations can be terminated without legal consequences in every circumstance.
The Supreme Court of Korea has held that where one party creates a legitimate expectation that a contract will be concluded, the other party acts in reliance on that expectation, and negotiations are then terminated without reasonable grounds, liability in tort may arise depending on the circumstances.(Supreme Court of Korea, June 13, 2013, Case No. 2010Da65757)
This does not mean that liability arises whenever investment negotiations fail.
The stage of negotiations, the representations made by the parties, the extent of reliance, and the reasons for terminating negotiations must be considered together.
7. Why Legal Review of a Term Sheet Matters
The legal effect of a term sheet cannot be determined solely by whether the document has been signed or whether it is described as preliminary.
It is necessary to examine:
- Which investment terms have already been finalized
- Which provisions are legally binding
- Whether the parties are obligated to enter into a definitive agreement
- Whether exclusivity or confidentiality obligations apply
- What consequences follow if the transaction does not close
Because a term sheet may become the basis for the subsequent investment agreement, companies and investors should review not only valuation and investment amount but also provisions that may restrict further negotiations or create liability if the transaction is terminated.
Decent Law Firm advises startups, companies, and investors on term sheets and investment agreements, including the scope of legally binding obligations and contractual risks that should be addressed before proceeding with an investment.
