Parties commence meaningful discussions on M&A transactions by first drawing up a ‘Letter of Intent’ (LOI) where a prospective acquirer and target entities lay down a broad framework of material terms and conditions of the anticipated deal. LOIs are not an alternative to transactional documents - rather, they are interim arrangements that safeguard parties’ interests for a limited period before parties enter into formal agreements.
An LOI can be as detailed or as simplistic to fit the parties’ requirements and complexity of the proposed transaction.
In addition to boilerplate clauses, an LOI also includes terms that are specific to each transaction. These terms can stem from sector/industry-specific regulations applicable to the entities, their financial positions and unique business requirements.
There are numerous benefits of entering into a Letter of Intent in the early stages of deal discussions - the sooner that parties can establish their mutual intent and tackle deal-breaker issues at the outset, the faster the due diligence process can commence and smoother the negotiations. Hence, agreeing on the terms of an LOI warrants attention by both sides on the table as its terms directly impact negotiation of the definitive documents and deal closure.
Factors To Consider In A Letter of Intent
Here are two factors that should be considered while making a letter of intent.
Discussions amongst prospective parties in the preliminary stages routinely spill over countless email exchanges and meetings. To minimize any conflicting expectations, the LOI should clearly set out that it constitutes the parties’ most recent understanding and supersedes all prior written and oral discussions on the proposed transaction.
To encourage speedy progression of deal timelines, parties may also set out an outer limit for the validity of an LOI (e.g. 30 days, 90 days from the date of signing), on the expiry of which the LOI could either stand terminated or the validity period could be mutually extended by the parties for a further limited period.
If neither party intends to be bound by the terms of a Letter of Intent in the early stages, the language should clearly state that the LOI is non-binding and that binding obligations would be created only by the parties entering into formal contracts.
It is also common for parties to have a mix of clauses within the LOI as binding or non-binding, rather than rendering the entirety of an LOI so. In such cases, an LOI should use unambiguous language to distinguish between the clauses intended to have binding or non-binding effect. It is common for parties to specify clauses pertaining to confidentiality, exclusivity, costs & expenses and jurisdiction as binding.
Our next article will outline key clauses featured in an LOI in M&A transactions.