Letter of intent for merger and acquisition

The letter of intent in mergers and acquisitions is a written, non-binding document that outlines an agreement in principle for the buyer to purchase the seller’s business. The letter, also known as a letter of intent or LOI, sets out the proposed price and terms of the merger or acquisition.

Signing the letter of intent

It is wise to have the letter of intent signed by both parties before the buyer proceeds with the due diligence phase of the acquisition. The letter of intent contains a description of the price and payment terms of the transaction and the assets to be purchased. It also specifies matters such as the distribution of costs to be incurred, a non-competition clause, a confidentiality clause and an exclusivity clause, also known as a “no-shop clause”.

What is the purpose of a letter of intent?

A letter of intent (LOI) sets out the mutual intentions of parties negotiating an acquisition, merger or collaboration. The document often contains agreements on commercial arrangements, the value of a company, the form of collaboration, exclusivity, confidentiality and planning, and may indicate which parts are already binding and which are still subject to change. The purpose is to create clarity. Both parties know where they stand and what they can expect from each other during the negotiations. However, it should always be borne in mind that many provisions in the LOI are not binding; compliance with the agreements cannot always be enforced. It is therefore important to clearly state in the LOI which agreements are binding and which agreements only contain the intentions of the parties.

The difference between an LOI and a term sheet

A letter of intent is a broad document that can be drawn up and used in various situations relating to mergers and acquisitions. Another way of setting out the most important conditions for purchasing a company or investing in a business is to draw up a term sheet. The difference between a letter of intent and a term sheet is small and usually a matter of style: an LOI is often written in letter form and focuses on the intentions of the parties; a term sheet skips most of the formalities and lists the most important agreed terms in bullet points or a similar format. A head of terms is another term that is often used for a term sheet.

Is a letter of intent binding?

A frequently asked question is whether a term sheet and a letter of intent are binding. Both are preliminary, usually non-binding documents, intended to record the intentions of two or more parties to enter into a future agreement based on specified (but incomplete or preliminary) terms. The Supreme Court has ruled that whether a letter of intent is binding depends on what both parties intended and what they could expect from each other given the circumstances of the case. It is therefore important to include a reservation or suspensive condition in the letter of intent if you do not want to be bound without further ado. It is often clear whether this has already occurred or not, and you will know whether the LOI is binding or not.

Is a letter of intent always non-binding?

A letter of intent is in principle intended as a non-binding document, but that does not mean that all parts are non-binding. Certain provisions may be legally binding if the parties so stipulate. The behaviour of the parties may also indicate that they already intended to comply with the agreements made, which can lead to surprises in the event of a conflict. It is therefore crucial to explicitly state in the letter of intent which parts are binding and which are not.

What is a memorandum of understanding?

A memorandum of understanding is also a common agreement in the preliminary or orientation phase of a company takeover. The translation of this term already indicates that there is a memo of agreement, in short, a document that describes the broad outlines of an agreement reached by two or more parties. The main difference between the two is that a letter of intent is not binding, while a memorandum of understanding is more likely to be considered binding and carry weight in a court of law.

Why is legal advice important when drafting a letter of intent?

Legal advice when drawing up a letter of intent is crucial in order to determine exactly which agreements are binding and which are not. Without clear legal wording, intentions can unintentionally turn into enforceable obligations, with all the risks that this entails. The solicitors at Fruytier Lawyers in Business can help you avoid pitfalls.

Drawing up a letter of intent

It is easy to find an example of a letter of intent on the internet, but describing the basic principles and whether you want the letter to be binding quickly or not requires legal knowledge. If you are entering into discussions about the purchase or sale of a company, it is wise to put certain agreements on paper in advance. Whether you want to do this in the form of a letter of intent, term sheet or memorandum of understanding, the company acquisition solicitors at Fruytier Lawyers can help you with this. It is better to have everything properly arranged in advance than to have to deal with complications afterwards.