Letter of Intent for Mergers and Acquisitions
When coming into a merger or acquisition of a company, each party should ensure that they have an equal understanding and should do so before getting into negotiations. Mergers and acquisitions expend both time and money, so confirming that both parties are ready early on is key to preserving resources. A concrete step to take to ensure understanding is to draft a letter of intent (LOI), laying out the deal points of the merger or acquisition. An LOI serves as a sort of pre-contract”
The LOI is typically written by the purchasing party and submitted to the selling party. The letter, which establishes the basic terms of the transaction, is not binding but should be carefully reviewed as a precursor of the forthcoming negotiations. Since it is a preview of the transaction, the seller will want to make the terms attractive to the seller, but still realistic. If the terms are not realistic and the other party feels the LOI was not written in good faith, it could cause issues and legal disputes down the line. It should be understood by the seller that the LOI leaves a margin of change for the final terms, especially after due diligence.
What is Included in a Letter of Intent?
The provisions of an LOI can vary, but should include:
- Purchase price and terms of payment;
- Conditions of closing;
- Acquisition of assets vs. shares;
- Guarantees of exclusivity for a certain period of time;
- Non-disclosure and confidentiality clauses;
- Good faith clauses.
It is important to review the LOI carefully to make sure there aren’t any unfair or one-sided terms. The seller is responsible for their own due diligence and without it, they may lose their right to take legal action down the line. The expertise of an attorney to review the LOI could further prevent each party from future conflict.