This text focuses on the memorialization of buy provides in a letter of intent (“LOI”) in merger and acquisition (“M&A”) transactions.
Overview
An LOI is a doc that’s sometimes utilized in an M&A transaction. It is likely one of the most necessary paperwork within the transaction and serves as a preliminary settlement between the client and vendor.
LOIs are sometimes entered into after discussions concerning a possible enterprise acquisition have reached a threshold stage the place each the possible purchaser and vendor want to memorialize the high-level phrases of the proposed transaction. Generally, the primary draft of an LOI shall be utilized by the client to current its formal provide; nevertheless, in some instances, the vendor will initially current the phrases it’s prepared to simply accept. Usually, an LOI won’t be drafted till the client has performed sufficient preliminary due diligence to provide it a excessive diploma of confidence that it needs to pursue the transaction.
The LOI units out the important thing enterprise phrases that the events agree shall be included within the definitive transaction paperwork, such because the transaction construction, buy value, cost of the acquisition value, working capital adjustment provisions, the position of the vendor after closing, and many others. This portion of the LOI is non-binding, which means it’s solely an expression of intent, and neither celebration is obligated to maneuver ahead with the transaction. Nonetheless, however that the LOI is non-binding on these phrases, the events might really feel morally sure to abide by these throughout later phases of contract negotiation, so the “non-binding” nature generally is a little bit deceptive. Moreover, the LOI might comprise phrases concerning the conduct of the deal course of itself, for instance, obligations of confidentiality and unique dealing, which are sometimes binding (as mentioned additional under).
Getting into into an LOI has a number of advantages, together with (1) figuring out key points for every celebration early within the course of, (2) limiting the scope of things up for negotiation as soon as the events attain the stage of memorializing the transaction in definitive documentation, (3) if relevant, introducing sure binding necessities (similar to exclusivity) which boosts the events’ potential to decide to the deal course of, and (4) offering key phrases which may be shared with inside stakeholders (similar to fairness holders, administration, and key staff) or exterior events (similar to lenders) whose participation in and understanding of the deal at an early stage will assist facilitate a smoother and extra environment friendly deal negotiation and shutting.
Events must be conscious, nevertheless, that LOIs might current dangers to the events if not correctly thought by way of and managed, together with probably (1) limiting the events’ potential to stroll away from the deal on account of an implied obligation to barter in good religion which courts might impose, (2) limiting a celebration’s potential to vary its thoughts on phrases, as the opposite celebration will usually insist a acknowledged time period within the LOI (even when not legally binding) shouldn’t be altered except new details or circumstances come up, and (3) growing deal prices and timelines, significantly if the phrases of the LOI develop into complicated and closely negotiated by principals, attorneys and monetary advisors.
LOI Provisions
The provisions contained in an LOI can fluctuate, however they usually embrace some mixture of the next phrases, not all of which shall be relevant relying on the actual transaction:
- Principal Enterprise Phrases (i.e. deal construction, buy value, type of consideration);
- Materials Signing and Closing Circumstances (i.e. approvals, financing, tax clearances, diligence);
- Abstract of Representations and Warranties to be included;
- Abstract of Indemnification (i.e. caps, baskets, survival intervals);
- Any Obligatory Ancillary Objects (i.e. employment preparations, transition companies);
- Exclusivity Obligations;
- Confidentiality Obligations;
- Non-Solicitation Necessities;
- Tax Remedy;
- Public Bulletins;
- Allocation of Bills of the Events;
- Termination Rights; and
- Binding or Non-Binding Provisions.
Binding vs. Non-Binding; Good Religion
Usually, nearly all of provisions in an LOI are non-binding, because the events want to impose an ethical obligation to progress negotiations on phrases agreed in precept with out creating legally binding preparations till a definitive settlement has been executed. Nonetheless, exclusivity, confidentiality, bills, and non-solicit provisions usually are binding, as these phrases are understood to be of serious significance to the method of negotiation itself, and the failure of a celebration to abide by these obligations previous to signing the acquisition settlement might lead to materials damages to the opposite celebration.
- Exclusivity: Earlier than committing time, cash, and different assets, a purchaser needs reassurance {that a} vendor won’t pursue competing transactions or just use the client’s bid as a way of attracting extra curiosity.
- Confidentiality: Throughout and following the LOI stage, earlier than a definitive settlement is signed, the events will nearly at all times be sharing delicate data with each other that may be dangerous if disclosed to opponents or the general public. The events additionally often want to maintain the truth that a possible transaction is being negotiated a secret.
- Non-Solicitation: Each the client and vendor might want enforceable authorized safety in opposition to the opposite celebration recruiting and hiring their personnel, as every celebration will sometimes have entry to key staff throughout negotiations.
- Bills: Allocation of bills incurred throughout deal negotiations could also be binding in order that neither celebration has uncertainty concerning the potential of the opposite celebration to make unanticipated claims concerning these obligations.
It will be significant that the events clearly and particularly state which provisions, if any, are legally binding and which aren’t. For binding provisions, the phrases have to be sufficiently sure, and there have to be consideration to be able to fulfill the weather of a sound contract. Non-binding phrases likewise must be clearly recognized; in any other case, a court docket might analyze components to find out the intent of the events, and this might lead to a discovering {that a} celebration’s failure to abide by a provision was a breach of a legally enforceable contract.
Even when an LOI is usually non-binding, the client and vendor could also be obligated to barter in good religion if the settlement is silent on this level. This implies a celebration who indicators an LOI intending to barter a deal after which merely pulls out or in any other case fails to undergo with negotiations may very well be answerable for failing to barter in good religion. Subsequently, the events ought to expressly disclaim good religion in the event that they don’t need that obligation to be imposed as an implied time period.
Abstract
In abstract, if correctly thought of and drafted, the LOI is an efficient and extremely useful gizmo for consumers and sellers to progress an M&A transaction. Deal ideas and advisors ought to pay shut consideration to (1) clearly stating binding vs. non-binding provisions, (2) limiting the LOI’s content material to key phrases quite than exhaustively masking each merchandise that shall be within the definitive settlement, (3) if extra data is critical for a celebration to decide to a deal level (even when non-binding), deferring settlement on that provision or qualifying it with acknowledged assumptions, and (4) figuring out the timeline and the situations obligatory to succeed in closing settlement of the definitive transaction doc.
We see that shoppers who perceive the deal course of are extra assured, much less overwhelmed, and get higher phrases. Having expert advisors in your staff will help you run a profitable deal. The mergers and acquisitions observe group at Riggs Davie PLC counsels shoppers by way of offers on the buy-side and sell-side in a variety of industries, together with know-how, well being care, well being tech, fintech, skilled companies, monetary companies, actual property, enterprise companies, manufacturing, and distribution. For extra details about our companies, please go to www.riggsdavie.com or contact our observe group by electronic mail at dealteam@riggsdavie.com.
This text is for basic data solely. The data offered shouldn’t be construed to be formal authorized recommendation nor the formation of a lawyer/consumer relationship.