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M&A: Letters of Intent

Letters of Intent (the LOI) in mergers and acquisitions (M&A) transactions are often the starting point on the road towards a successful deal and usually one of the first documents negotiated by the parties. The LOI is essentially a written expression of the parties’ intent to enter a transaction and a summary of the material terms. Since negotiating an M&A transaction (or any transaction for that matter) is time-consuming and costly for both parties and can disrupt the seller’s daily operations, preparing an LOI can be a productive and efficient step. The LOI allows the parties to determine early in the process whether there is a basic agreement on key terms and also confirm (i) that there is a serious commitment to negotiate a transaction, (ii) the general parameters of the transaction, (iii) the manner in which the parties expect to proceed, and (iv) that there are no non-negotiable issues before either party has invested or devoted substantial time and resources. In addition, an LOI helps to facilitate the preparation and negotiation of the definitive transaction documents by serving as an outline of the key provisions and expectations.

However, not every M&A transaction requires an LOI. For example, the transaction may be straightforward and void of complexity, or involve a purchase and sale between current owners or management where very little due diligence is necessary. In such cases, the parties may choose to go directly to negotiating definitive agreements. These cases, however, are not common. Most M&A transactions are not simple, and LOIs have become the standard for serious and committed buyers and sellers.

At the start of negotiating the LOI, the parties often have limited information and typically have not engaged in comprehensive due diligence, and therefore the proposed terms that are included in the LOI are generally not legally binding on the parties.[1] However, as a practical matter, the LOI sets the expectations of the parties regarding the final terms, and any deviations from such terms after the LOI is signed will require justification.[2]

Even though LOIs vary widely based on the needs and goals of the parties and the specifics of the deal, in many cases the following non-binding and binding terms and provisions are included.

Non-Binding Terms

Structure. The structure of a transaction can have significant implications in regards to purchaser liability, tax treatment, and closing mechanics. Because of this, the structure of the transaction (such as whether it is a stock sale, asset sale, or merger) is often one of the first terms of an LOI.[3]

Purchase Price. The LOI will also typically include not only the proposed amount to be paid for the acquired business, but also some detail about the form of payment (i.e., cash, stock of the buyer, a seller note or a combination of these). In addition, the timing and manner of payment is usually specified to describe how much will be paid at closing versus what may be paid following the closing and whether any post-closing payments will be contingent upon future events or on the business meeting certain performance targets or other metrics (often referred to loosely as an “earn-out”). If the buyer expects a portion of the purchase price to be placed in escrow to secure any indemnification or other obligations of the seller, it also is often included.[4]

Indemnification. Often, an LOI will include a brief summary of the parties’ expectations for the non-financial terms of the definitive purchase agreement, especially regarding the scope of the seller’s indemnification obligations to the buyer. Sometimes, the parties will take the time to include specific detail such as the length of survival of indemnification and the limitations on indemnification (e.g., baskets and caps).

Key Closing Conditions. It is common to include a list of the expected closing conditions, such as any regulatory approvals or third-party consents that will be required. A buyer may also include whether its ability to obtain financing is a condition to closing (known as a financing contingency). Also, the buyer may want to specify its expectations regarding any non-competition agreements and other restrictive covenant agreements to be provided at closing.

Management Arrangements. Some LOIs, especially when the buyer is a private equity firm, will include a brief description of the buyer’s intentions for “key” management employees, including key employment terms and a description of any plans for incentive equity grants.

Due Diligence. The LOI often describes the scope of the buyer’s proposed due diligence review and the access to information, and any limits to that information, that will be provided by the seller.

Binding Terms

Exclusivity. In an M&A transaction involving a private company target, the LOI usually contains an exclusivity provision that restricts the seller from negotiating or soliciting offers from other potential buyers. The period of exclusivity is usually a critical term and frequently will drive the timeline for the subsequent diligence process and negotiation of agreements, although it is not uncommon for the period to be later extended by the parties.[5]

Confidentiality. The LOI may provide that its terms are subject to other confidentiality agreements previously entered into by the parties or, if there are no such agreements, that the terms of the LOI and the information shared between the parties will be held in confidence and not disclosed.[6]

Expenses. The LOI also often includes a provision describing how the transaction expenses will be divided between the parties. Often this section will provide that each party will bear all expenses incurred for its own benefit (e.g., legal and broker fees) and may provide for the sharing of other expenses (e.g., regulatory filing fees).

Governing Law. As with most M&A deal documents, an LOI commonly includes a provision regarding which jurisdiction’s laws will govern any disputes that may arise from it.

Additional Considerations

Use of Advisors. Sometimes, parties to a potential transaction will wait until after an LOI is signed before contacting legal, tax, and accounting advisors to assist with the deal. This is often a poor choice of action. For the benefit of both parties, advisers should get involved before the LOI is signed. Critical decisions are made at the time of negotiating an LOI, such as the structure to be used for the transaction, which could have a significant impact on the economics and risk-allocation of the deal. Even though most of the terms of the LOI are non-binding, once the LOI is signed it is intended to serve as the outline of already agreed to terms (and concepts) for the deal and therefore creates expectations in both parties.

Potential Liability. Parties to an LOI should be careful to expressly state that the LOI is intended to be generally non-binding, but also clearly identify any provisions that are intended to be legally binding. Not making clear through precise and unambiguous language what is or is not intended to be binding under the LOI could have the unintended effect of committing the parties to terms before the final documents are agreed to and executed.

Non-Material Issues. While it is important to include the key terms proposed for the potential transaction, the details and finer drafting should be left until the definitive deal documents are prepared. Including non-material issues at the LOI stage can unnecessarily lengthen the time to complete this first step, potentially causing lost deal momentum, frustration, a longer overall transaction timeline, and greater cost.


LOIs are intended for the most part to be non‑binding and contingent upon the execution of definitive agreements so the parties should be careful to expressly state that in the LOI, as well as clearly state what provisions are intended to be binding. Again, there is a risk, that if the parties have negotiated a comprehensive, preliminary document, they may have unintentionally committed themselves to a deal. In that case, if negotiations are ultimately unsuccessful, a court might find that the LOI either is a fully binding agreement on its terms, or an agreement by the parties to negotiate and continue in “good faith.”

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This memorandum is a summary of the topics discussed above and does not purport to provide legal advice. No legal or business action should be based upon the above summary. Questions concerning the topics or issues addressed in this memorandum should be directed to:

Sonya Tien

Tel: (888) 988-6613


[1] There are many times, however, where certain terms and provisions are expressly stated to be legally binding in the LOI (e.g., exclusivity, confidentiality and good faith) which are discussed in greater detail below.

[2] LOIs are often “pitched” to sellers as simple because they are mostly non‑binding. Because of this, they are sometimes signed by a seller without legal advice. As discussed below, this is a mistake. LOIs vary widely in scope and detail, and both the seller and the buyer should involve legal counsel early on. Failure to do so increases the opportunity for later deal point changes and disagreements by either party, which promotes potential misunderstanding on key provisions and tension

[3] For example, If there will be rollover equity (post-deal ownership of the business by the seller), it may be outlined in this provision of the LOI as well.

[4] See also the discussion under the heading “Indemnification” below.

[5] An important distinction is being made here. Exclusivity agreements in a public target company is not as straight forward as in private deals, but rather can require complex analysis, reflection and thought due to the Revlon duties activated in public M&A transactions. In such instances of sought after exclusivity, the parties may wish to set forth a provision in the LOI agreeing to include a post signing market check (or Go Shop) provision in the definitive agreement and have it be an explicitly binding provision in the LOI. There are other types of mechanisms available to satisfy the board of directors’ (and the company’s) Revlon duties of care and loyalty (e.g., by including window shop or express fiduciary out provisions in the definitive agreement).

That said, however, if the public target company were to receive an unsolicited offer or bid before a definitive agreement is executed, then Revlon would continue to apply and a separate analysis would be required as to whether the agreed upon exclusivity in the LOI is enforceable. There are also other questions and issues in public M&A transactions relating to such sets of circumstances that lay beyond the scope of this memorandum.

[6] This is typically a broad and unspecific provision. It should be bolstered by a formal Non-Disclosure Agreement that sets forth and prioritizes the important information being revealed and provided between both parties and their specific legal commitment to keep such information confidential, as well as to take, or not take, certain actions (e.g., returning all “confidential information” provided during the due diligence or negotiation phases if a transaction is ultimately not successful or agreeing not to make copies or replications of any information provided).

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