Orientation phase of an acquisition

In the exploratory phase of an acquisition, the seller looks for a potential buyer for their company or a buyer looks for a company to acquire. Once the parties have found each other, the first step is to gauge whether they are on the same wavelength with regard to price and conditions. Although in some cases this still involves informal consultations (sometimes without lawyers), legal aspects immediately come into play. Please note that it is important to make agreements as early as possible in the negotiation process regarding, for example, confidentiality and a non-solicitation clause with regard to key personnel.

In almost all cases, we advise our clients to sign a confidentiality agreement or “non-disclosure agreement” as soon as possible in this acquisition process.

Letter of Intent (LOI)

Also referred to as a memorandum of understanding, heads of terms, or term sheet. The content of these documents is often similar: the parties, buyer and seller, set out the main points of the agreement (deal) in a letter of intent. The letter of intent forms the basis and often the conditions for further negotiations. It is customary to include the following topics in the letter of intent:

• Parties: which entities will act as seller and buyer?
• Shares: which shares are being sold and what percentage of the shares does this represent?
• Planning of the negotiation and acquisition process: what does the further process look like?
• Price (-mechanisms): what is the purchase price or on the basis of which mechanism is this price calculated?
• Form and timing of payment: Payment immediately after delivery? Or is there, for example, an earn-out?
• Conditions: often linked to, for example, a due diligence investigation that must be completed satisfactorily and the financing for the purchase price;
• Confidentiality: what information is confidential? How should this confidential information be handled? And are there any penalty clauses that apply?
• Exclusivity: are the parties negotiating with each other on an exclusive basis and, if so, for how long?
• Transaction costs: agreement on who will bear the costs of the due diligence investigation and the transaction documentation.
• Choice of law and forum: which law applies and which court has jurisdiction? In all cases, it is advisable to include a provision on this.

Our experience is that letters of intent vary greatly from one transaction to another. This is due to the complexity of the companies and the transaction itself, the nature of the parties, and the specific business of the company to be acquired. Seek sound legal advice on this matter.

What are the advantages of drawing up a letter of intent?

In practice, a letter of intent (LOI) is a valuable tool for clearly setting out the expectations of the buyer and seller in the early stages of an acquisition. The document provides clarity on the topics of negotiation before any costs are incurred. This prevents the parties from investing unnecessary time and money when they have fundamental differences. In particular, the LOI phase is used by the parties to mutually establish the enterprise value and the assumptions made to arrive at that value. This helps the parties to reach binding agreements on the purchase price after the due diligence phase. It also strengthens the negotiating position. The seller can enforce commitment, while the buyer can include conditions precedent to maintain flexibility.

Is the letter of intent binding?

A letter of intent can quickly become binding. That is why this remains a legally sensitive issue, which is the subject of much litigation. As a rule of thumb, you could say that it is in the buyer’s interest for the LOI to be non-binding, apart from exclusivity and confidentiality. The buyer will try to ensure that sufficient suspensive conditions are included—such as satisfaction with the outcome of the due diligence—so that they can still withdraw from the acquisition.

It is in the seller’s interest that the buyer commits as much as possible and that the document serves as a preliminary purchase agreement, making it difficult for the buyer to withdraw from the purchase (without suffering any consequences).

The interests of the buyer and seller are therefore significantly different. Ensure that your interests are properly safeguarded and seek assistance from a professional at Fruytier Lawyers in Business. Feel free to contact one of our corporate lawyers.

Are there any risks associated with a letter of intent?

Although a letter of intent is intended to create a framework, the risk lies precisely in the legal uncertainty. When is something binding or not? In practice, disputes regularly arise because one party wants to withdraw, while the other believes that a preliminary agreement already exists. Provisions regarding price, exclusivity, and progress in particular can be interpreted as binding, whether intentionally or not. It is also true that the more concrete and detailed the LOI is, the greater the chance that a judge will attach legal consequences to it. This is especially true in situations where the parties behave as if the deal has already been concluded.

What are common pitfalls when drafting a letter of intent?

In practice, we regularly see parties unintentionally falling into legal pitfalls when drafting a letter of intent. A common mistake is that the text is too vague or, conversely, too detailed, leaving it unclear which parts are binding. This leads to the risk that the court will assume binding force in the event of a conflict. It also happens that parties forget to include essential matters. In addition, the importance of a clear confidentiality or non-solicitation clause is often underestimated. Finally, parties sometimes behave as if a deal has already been concluded, even before the formal purchase agreement has been finalized – with all the legal and commercial consequences that entails.

How can the lawyers at Fruytier Lawyers in Business help you?

Our lawyers will guide you from the initial negotiation phase to the conclusion of the final deal and the execution phase of the transaction. When drafting or reviewing a letter of intent, we ensure that your objectives are legally sound, without unnecessary risks. We think strategically with you about which parts should be binding and which should not, and translate that into clear, legally enforceable provisions. We also advise on the structure of the further process. Thanks to our experience in a wide range of sectors, we identify bottlenecks at an early stage and, where necessary, negotiate with the other party on your behalf. In short: we ensure that your interests are well protected and that the acquisition proceeds in a predictable and manageable manner. Feel free to contact us for a no-obligation consultation.