Stage 3: The Pre-Acquisition Outlining of Initial Terms
Letter of Intent: A basic, typically non-binding document outlining the initial structure and terms of a future sale. Also called a Memorandum of Understanding (MOU); an Indication of Interest (IOI); a Term Sheet; or, in the UK, a Heads of Agreement.
Before any transaction is actually consummated, the Buyer’s and Seller’s early-stage discussions are often outlined in the preparation of a document called a Letter of Intent (“LOI”).
Most LOI provisions are typically not legally binding, and include:
- General details on Structure (i.e., Stock vs. Asset Sale, and, if the latter, a general description of the assets being sold);
- Key Deal Terms (such as price, form of payment, etc.);
- General terms outlining the scope and nature of Due Diligence; and
- the expected Closing Date.
The purpose behind including such non-binding terms is to outline the parties’ initial intentions with respect to terms of the proposed transaction.
However, a couple of notable LOI provisions that typically are legally binding include:
- Confidentiality Clauses; and
- “No-shop” Clauses
Confidentiality Clauses protect the Seller’s proprietary information during the Due Diligence document exchange process.
“No-shop” Clauses often restrict both parties’ ability to make a deal with others for a set time period.
It’s best to reach agreement on as many of the general LOI deal terms as possible. If the parties can’t agree, in general, on the important terms of a deal at this stage, it may make no sense to proceed to the next phase -- the drafting of the Purchase Agreement.
In the next article, we’ll discuss Stage 4 – the Purchase Agreement.
About the author
Mr. Carbajal is a graduate of Harvard Law School, and the Principal of the Carbajal Law Firm, P.C., a business and corporate law firm representing established national and international businesses and emerging growth companies across a broad range of industries. He advises businesses on all stages of their life cycle, with particular expertise in the purchasing and selling of businesses. He serves as outside corporate counsel to a range of clients. Mr. Carbajal also advises U.S businesses seeking to expand abroad as well as foreign businesses interested in entering the U.S. market. He was most recently listed as a Super Lawyer in Corporate-Business law in the 2018 Annual Directory of Super Lawyers, published by Thomson Reuters.Website