A Lawyer's Thinking on Drafting A Letter of Intent

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At the beginning stages of any transaction (stock sale, asset sale, merger, etc.), the parties often find themselves engaged in back-and-forth discussions with counsel, business teams, accountants, and other advisors. Typically, as these discussions mature, the parties desire to memorialize the upcoming transaction with a formal letter of intent. Although each letter of intent is different and tailored to the specific transaction, a few topics appear in virtually all letters of intent. I have highlighted a few of these below.

Transaction Summary: A comprehensive letter of intent should include, at a minimum, a summary of the "big picture" transaction. For example, "The following letter represents a summary of the terms of our proposal regarding an acquisition by Company A of 100% of the issued and outstanding stock of Company B." Although simple and straightforward, including this statement at the beginning of the letter conveys to each party the nature of the transaction and intended outcome. This statement serves as a guidepost for each party -- making clear where the transaction is headed. All of the terms, conditions, covenants, etc. contained in the letter of intent should, in some way or another, work to move the parties closer to achieving this stated objective.

Timeline and Milestones: A transaction will have twists and turns, bumps in the road, roadblocks, and other unforeseen events -- don't let this prohibit you from attempting to layout timelines and milestones for the transaction -- don't let perfect be the enemy of good enough. A simple timeline or set of milestones can serve as a roadmap for the parties to follow throughout the transaction. Depending upon the nature of the transaction, specific times/dates can be less important than simply keeping the parties moving in the right direction. Additionally, a loose framework of where things are headed and on what schedule can be a great resource for each party (and their advisors) to use when considering and preparing for next steps in the process.

Exclusivity: A letter of intent should always specify whether the parties are entering into an exclusive relationship. Generally, this is a protection for the buyer, as it prohibits the seller from "shopping" the deal to other bidders while the buyer is conducting its due diligence and working to finalize other parts of the transaction. This is a common protection for buyers to request, as many believe it would be unfair for a buyer to spend time and resources conducting research and due diligence, only to have the seller turn its back at the last minute and engage in the sale with someone else. Without this protection, a seller may find it difficult to gain significant interest.

Confidentiality: A letter of intent is likely to include sensitive and private information about the parties involved. Including a strong confidentiality provision ensures that this information is protected from dissemination to inappropriate parties. It should be noted that, if a confidentiality agreement was executed by the parties prior to the executing a letter of intent and the parties feel it appropriate, the letter of intent can refer to this previous agreement and state that the contents of the letter of intent are subject those same confidentiality obligations.

Binding Agreement: The decision to make a letter of intent binding hinges upon the progress of negotiations and relationship of the parties. Generally, parties do not wish to have the letter of intent be binding (thereby obligating the parties to consummate the transaction), as letters of intent are often executed at the beginning stages of a transaction with significant work remaining. An exception to this general rule is the confidentiality provision of a letter of intent (discussed above). It is in the best interest of both parties to make clear that the confidentiality provision is binding. Meaning that both parties are subject to the confidentiality provisions of the letter regardless of whether a transaction is finalized. If this is not made binding, once the letter of intent is terminated, the confidentiality obligations contained therein cease to exist and each party's confidential information is no longer protected.

Termination: Including a termination provision in a letter of intent is very important. This provision should specify how and when the letter of intent (and certain obligations contained therein) are terminated. Generally, events of termination can be specific dates or the occurrence of certain events or actions. It is important to include a termination provision to ensure that (i) no party is bound indefinitely by the terms of the letter and (ii) each party understands what actions (or inactions) may cause the letter of intent to terminate.