During a company transaction service, some instruments are drawn up even before the conclusion of the final contract by the parties. The letter of intent (the name of which, in an international context, may vary e.g. (memorandum of agreement, concept paper, heads of agreement).
The letter of intent is usually a prerequisite to transactions irrespective of the terms of the transaction under consideration. Indeed, negotiation of the contract will require that the parties set out its framework in order to attain efficiency improvements.
The existence of a letter of intent, far from being a hindrance in the transaction, has numerous advantages both for the seller and for the potential buyer.
Advantages of sending a letter of intent for a potential buyer
There are a large number of advantages for a potential buyer in sending a letter of intent:
• Sending a letter of intent enables negotiations to be built on a solid foundation and a memorandum of agreement to be reached quicker, particularly if the letter of intent contains a plan for funding the transaction.
• The existence of a letter of intent accepted by the seller proves to be a particularly useful, if not indispensable, tool in the potential buyer’s negotiation with its financial partners (e.g. banks etc.).
• The potential buyer has the option of including an exclusive negotiation provision between itself and the seller in its letter of intent, which, in the event of acceptance by the seller of the letter of intent, represents a significant benefit.
Advantages of the acceptance of a letter of intent by the seller
The advantages that a seller may find in accepting a letter of intent are highly significant:
• The letter of intent sent by a potential buyer may contain a certain number of commitments taken by this latter concerning, among others, the confidentiality of the negotiations.
• The letter of intent contains both the financial and the legal framework within which the potential buyer wishes to negotiate and therefore enables the seller to clearly assess the possibility of realising the transaction in order to take action on or discard the offer.
• In the case whereby the seller is in contact with a financial partner, the letter of intent enables a written document formalising a serious offer to be presented.
The advantages are therefore numerous for both parties in the negotiation process and justify a letter of intent being both sent by a potential buyer and accepted by the seller.
In practice, the parties in the negotiation process will ask themselves two types of questions. The first question, and the main one, is its legal status. Does it commit the person who sent it once it is signed by the other party in the negotiation process? The second question, which really concerns the sender of the letter, the potential buyer, consists in determining the content of such a letter.
The legal status of the letter of intent
In principle, the letter of intent is not binding for its author. It all depends on how it is drafted. The obligatory or non-obligatory nature of each clause for the parties will depend on how it is drafted. Some clauses may be drafted in such a way as to bind the parties in the event of acceptance of the provisions of the letter by the other party (confidentiality clause). It may be advisable, therefore, to seek the assistance of a lawyer to draft this letter.
The clauses of the letter of intent
The letter of intent usually contains a certain number of essential clauses (according to the case in point). However, these essential clauses may sometimes be accompanied by additional clauses addressing certain needs of the parties in the negotiation process.
• Determination of the purpose of the negotiations and the goal sought by the parties, e.g. acquisition of all or part of the capital of the target company.
• Proposal of a price range and stipulation of the terms of payment or the proposal of a method for determining the price.
• The duration of the negotiations and the terms of their exclusivity.
• A schedule of negotiations.
• A confidentiality clause (this clause will be obligatory in the event of acceptance).
• The terms and conditions for continuing the business of the target company during the negotiation period.
• The applicable law and the place of jurisdiction in the event of a dispute or an appeal to arbitration.
Possible additional clauses:
• The broad outlines of the representations and warranties (type, terms of implementation, duration).
• The broad outlines of a shareholders’ agreement (terms and duration of adherence to the agreement, right of pre-emption, liquidity clause etc.).
• Reference to the completion of a due diligence review.
• Non-competition clauses.
• Outcome for management.
• Any apportionment of negotiation costs.
• Reiteration of the obligation to negotiate in good faith. (Legal obligation but may be reiterated in the letter of intent).
• Reminder of the lack of creation of legal obligations as a result of the letter of intent.
• A substantial change clause (renegotiation of the terms of the letter of intent or termination of the negotiations without delay or indemnity if the economic factors or human resources having formed the basis of the ongoing negotiation should change drastically).
The letter of intent in a merger and acquisition transaction is a particularly effective and significant tool for both parties in the transaction. The existence of such a document, which will enable a considerable amount of time to be saved in the negotiation, is in the interests of both the seller and the potential buyer.