Letter of Intent in M&A Transactions (Part 2)

Anu Chowdhry
March 18, 2019

In our previous article, we discussed the benefits of entering into a Letter of Intent prior to undertaking in-depth due diligence and discussions in M&A transactions. An LOI includes deal specifics such as the deal structure contemplated, assets and liabilities proposed to be transferred, sale consideration, manner of payment (cash, stock, combination of cash and stock), to name a few.

Due diligence: With an exclusivity clause in an LOI (usually applicable for a limited period of 30 to 90 days), the buyer can undertake in-depth due diligence of various aspects of the seller's business such as legal/regulatory, finance and business operations. The LOI may describe the specifics of parties who may granted access to inspect the buyer's records.

Exclusivity: An exclusivity clause, popularly known as a 'no shop' clause, can serve to prohibit the seller from simultaneously seeking alternative proposals from other third parties whilst it is engaged in discussions with the prospective buyer. Although such a clause gives a prospective buyer a first-mover advantage, in order for it to be legally enforceable, the duration of an exclusivity clause should not be unreasonable.

Conditions: An LOI may also set out conditions that are to be fulfilled prior to closing. For instance, both parties may specify that the other should obtain requisite approvals from shareholders and the board of directors; a buyer may specify that the seller is required to obtain key licenses from regulatory bodies; etc.

Confidentiality: M&A transactions involve the parties exchanging troves of sensitive information concerning the business operations, intellectual property, key personnel, litigation, etc. Although parties may also sign separate non-disclosure agreements, a confidentiality clause in an LOI can help ensure that the preliminary discussions and transaction arrangement contemplated in the LOI are not disclosed to third parties.

Costs: Parties can set out the cost-sharing mechanism for costs likely to be incurred in the course of the transaction (e.g. due diligence costs, lawyers' and accountants' fees, etc).

Dispute resolution: Parties may also provide an arbitration clause as an amicable dispute resolution mechanism to address any disputes arising from the LOI. Additionally, the parties should also specify the jurisdiction whose governing laws are to govern any disputes.

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Anu is an M&A lawyer by training and now works on mergers of a different kind - combining perspectives of lawyers and engineers for legaltech solutions that deliver maximum impact to enterprises. Also a committed Saturday Night Live fan.