A letter of intent (“LOI”) may be used to identify and frame the deal terms of a potential transaction. LOIs may be binding, non-binding, or partially binding. In our experience, effective LOIs are typically partially binding, with the non-binding provisions relating to the description of the transaction, price, quantity, or delivery and with the binding provisions relating to the parties’ duties of confidentiality, due diligence, and exclusivity.
Benefits of LOIs
- Streamlining negotiations and exposing obstacles to executing the transaction. A well-drafted LOI can assist both sides with decreasing the time and overall costs incurred in connection with a transaction by alerting deal makers to potential hindrances and downsides of a deal.
- Providing flexibility with the timing of the transaction. An LOI can assist with the timing of a transaction, for instance, when a party may need to seek approval at a board meeting.
- Understanding the other side’s level of commitment. The time and energy required to put together a well-crafted LOI may be a tell-tale sign of how committed the parties are to the success of a transaction.
Risks Associated with LOIs
- Unintended consequences. LOIs, however, are not entirely without risk. If an LOI is not crafted clearly, one party may claim that the LOI is binding when, in reality, it is not.
In drafting an LOI, the most critical thing to do is state—in clear terms—whether the LOI is binding, non-binding, or partially binding. When drafting a partially binding agreement, use descriptive headers such as “non-binding understandings” and “binding agreements” to signal the binding vs. non-binding nature of those provisions.
In addition, the parties will want to make sure that commercially sensitive information in the LOI remains confidential. As a result, we recommend that the parties either execute a standalone confidentiality agreement or include some version of the following in the LOI:
Confidentiality. “This LOI, the matters discussed herein and information provided by one Party to the other in connection herewith (collectively, “Information”) are confidential and shall not be disclosed by the receiving Party without the prior written consent of the other, except to the extent that disclosure is required by law. When disclosure is required by law, the Party making the disclosure shall provide written notice of the intended disclosure to the other Party and shall take all reasonable steps to limit the extent of the disclosure to the minimum required to comply with its legal obligations. Neither Party shall have any obligation with respect to any Information that is or becomes publicly available without fault of the Party receiving the Information.”
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This material is provided for informational purposes only. It is not intended to constitute legal advice, nor does it create a client-lawyer relationship between MNK Law and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material.