Letter of intent in mergers and acquisitions
The letter of intent in mergers and acquisitions is a written, non-binding document that outlines an agreement in principle for the buyer to buy the seller’s business. The statement, also called a letter of intent or an LOI, sets out the proposed price and terms of the merger or acquisition.
Signing 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 of the assets to be acquired. It also specifies things like the allocation of costs to be incurred, a non-compete clause, a confidentiality clause and an exclusivity clause, also known as a no-shop clause.
The difference between an LOI and a term sheet
A letter of intent is a broad document that can be drafted and used in various situations with regard to mergers and acquisitions. Another way to set out the key terms for buying a business or investing in a company is to draft a term sheet. The difference between a letter of intent and a term sheet is minor and mostly a matter of style: an LOI is often written in letter form and focuses on the parties’ intentions; a term sheet skips most of the formalities and lists the main agreements agreed in bullet-points or a similar format. A head of terms is another term commonly used for a term sheet.
Is a letter of intent binding?
A common question is whether a term sheet and a letter of intent are binding. They are both preliminary, usually non-binding documents designed 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 in determining whether a letter of intent is binding, this depends on what both parties mutually intended and what they were entitled to expect from each other given the circumstances of the case. It is therefore important to include a proviso or condition precedent in the letter of intent if you do not want to be bound just like that. It is often clear whether it has already been entered or not, and you will know whether the LOI is binding or not.
What is a memorandum of understanding?
A memorandum of understanding is another common agreement in the preliminary or orientation phase of a business acquisition. The translation of this term already indicates a memorandum of understanding, in short, a document that describes the broad outline of an agreement reached by two or more parties. The main difference between the two is that a letter of intent is non-binding, while a memorandum of understanding is more likely to be considered binding and have weight in a court of law.
Drafting a letter of intent
It is easy to find a sample memorandum of understanding on the internet, but defining the principles and whether you want the statement to be binding quickly or not requires legal knowledge. If you are going into talks about buying or selling a business, it is smart to put certain agreements on paper beforehand. Whether you want to do that in the sense of a letter of intent, letter of intent, term sheet or memorandum of understanding, the business acquisition lawyers at Fruytier Lawyers can help you with this. It’s better to get everything right beforehand, rather than hassle afterwards.