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Orientation phase of an acquisition

In the orientation phase of an acquisition, the seller is looking for a prospective buyer for his company or a buyer is looking for a company to be acquired. Once the parties have found each other, early consultations will be aimed at checking whether the parties are on the same wavelength in terms of price and conditions. Although in some cases these consultations are still informal (sometimes still without lawyers), legal aspects start playing a role immediately. Note therefore, that it is important to make agreements as early as possible in the negotiation process about, for example, confidentiality and to agree on a non-recruitment clause with regard to key personnel. In almost all cases, we advise our clients to sign a non-disclosure agreement or NDA and to do so as soon as possible in this acquisition process.

Letter of Intent (LOI)

This is also referred to as a memorandum of understanding, heads of terms or term sheet. The content of these documents often comes down to the same thing: the parties, i.e. the buyer and the seller, lay down the main points of the agreement (deal) in a letter of intent. The letter of intent forms the basis and often also the conditions for further negotiations. It is customary to include the following in the letter of intent, among other things:

  • Parties: which entities will act as the seller and buyer?
  • Shares: which shares are sold and what percentage of the shares are these?
  • Planning the negotiation and acquisition process: what does the rest of the process look like?
  • Price (mechanisms): what is the purchase price or on the basis of which mechanism is this price calculated?
  • Method and time of payment: Payment immediately after delivery? Or does it involve an earn-out, for example?
  • Conditions: often linked to, for example, a due diligence investigation which must be completed satisfactorily and to the financing for the purchase price;
  • Confidentiality: which information is confidential? How should this confidential information be handled? And do penalty clauses apply?
  • Exclusivity: do the parties negotiate with each other on the basis of exclusivity and, if so, during what period?
  • Transaction costs: agreement on who will bear the costs of the audit and 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 about this.

Our experience is that letters of intent differ substantially from transaction to transaction. The complexity of the companies and the transaction itself, the nature of the parties and the specific business of the company to be acquired. We recommend seeking proper legal advice for this.

Is the letter of intent binding?

Note that it tends to be. That is why, from a legal perspective, this remains a tricky issue and the subject of much litigation today. As a rule of thumb, you could say that the buyer would benefit from the LOI being non-binding, apart from exclusivity and confidentiality. The buyer will try to ensure that sufficient suspensive conditions are included, such as a satisfactory outcome of the due diligence, so that he can still decide against the takeover. The seller has an interest in the buyer committing himself as much as possible and in the document serving as a preliminary purchase agreement, making it difficult for the buyer to walk away from the purchase (unscathed). The interests of the buyer and seller are therefore significantly different. Make sure your interests are properly safeguarded by having a professional from Fruytier Lawyers in Business assist you.

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