UNDERSTANDING LETTERS OF INTENT – TOWARDS BETTER MERGERS & ACQUISITIONS

Nature and Benefits of Letters of Intent

A letter of intent (LOI) is a preliminary document usually prepared by a purchaser, in which the intention of the parties and the proposed course of action towards the negotiation and completion of a deal is captured and jointly executed.1 It may also be called a ‘Heads of Agreement’, or a ‘Memorandum of Understanding’. The purpose is to identify deal parameters, agree on them and chart the way forward for the negotiation of material terms and completion. It is in our view, a framework document to guide parties in negotiating and completing a deal.

From a purchaser’s perspective, the LOI is important because it gives some assurance that negotiations will proceed and where the LOI contains an exclusivity clause, there is further assurance that the vendor will not shop the deal around to other potential buyers during the exclusivity period. Even where the LOI contains a ‘go shop’ provision, the Purchaser can rely on the assurance of receiving a breakup fee in the event that the deal is shopped to another buyer. Thus, the purchaser has comfort to expend resources on due diligence (DD) and the drafting of a purchase agreement.2 For the vendor, a LOI shows some form of seriousness on the part of the purchaser to proceed with the deal3 especially where the LOI contains a break fee clause.

Sometimes, in a bid to get the preliminary  terms right, parties dwell on negotiating  the LOI thereby elongating the transaction  time and sometimes even terminating the  deal before negotiation commences.4 So,  LOI may not be beneficial to a purchaser  when there are competing bids (like in an  auction). In a recent transaction that a  colleague advised on in Africa, parties  dwelt so much on the LOI that the deal was  terminated before negotiation  commenced. The flip side to this is that a  LOI may show parties, at an early stage, the  deal breakers in the impending deal and  therefore save the cost of proceeding to  negotiation and DD.

Is a LOI binding?

Whether a LOI is binding or not will depend  on the governing law and jurisdiction of  the transaction. To ensure that a LOI does  not become a binding document but a mere  agreement to guide the negotiation of a  definitive agreement, parties have sought  to label the LOI with the heading “without  prejudice and subject to contract”. In civil  law jurisdictions such as France, a letter of  intent is generally not binding save for the  confidentiality, exclusivity and break fee  clauses. However, there is generally a  strong moral obligation not to deviate from  the terms of the LOI subsequently.5 This  makes it (morally) binding.

In UK and other common law jurisdictions  including Nigeria, a LOI is generally not binding  but may be construed as binding depending on  the circumstances of each case. This will very  much depend on the manner of drafting the LOI  and the conduct of parties. It is immaterial  whether the LOI is stated to be “without  prejudice – subject to contract” because the  Court will make a wholesome interpretation of  facts to ascertain whether a valid contract is  established. In so doing, the terms of a valid  contract (offer, acceptance, consideration,  intention to create legal relations and certainty of  terms) are relevant and will be ascertained from  the general circumstances of each particular case  to determine whether parties intended to be  bound by the LOI notwithstanding the terms of  the LOI.6 The Courts have also held that even  where the LOI is stated to be ‘subject to contract’,  parties may by their conduct, unequivocally  waive the ‘subject to contract’ term.7 The LOI  should therefore be drafted in such manner that  on an objective (reasonable man) interpretation  by the court, it does not show any intention by  parties to be bound. Essentially, the ‘meeting-of the-minds’ element of a valid contract should be  intentionally withheld in the LOI. This  underscores the need for a knowledgeable and  skillful transaction solicitor.

Insufficiency of the ‘No Intention Clause’

To ensure that a LOI is not construed as binding,  lawyers have devised a sort of ‘no intention’  clause in which they state in very explicit terms  that the LOI is not intended to be binding save  for the confidentiality clause, the exclusivity  clause and the break fee clause. We are of the  opinion that the a ‘no intention’ clause is a good  remedy albeit an insufficient one. A lawyer  drafting a LOI should take care to draft every  single clause in such manner that shows an  intention not to be bound, rather than draft the  clauses in certain and binding terms and  thereafter rely on a ‘no intention’ clause as the  magic wand to make it non-binding. It should be  clear from the language of the document that  there is a purposive intention to withhold the  ‘intention to be bound’ element of the contract.  For instance, the offer could be termed an  indicative offer while the price is reflected as an  indicative price to be confirmed after DD.

Also, any consideration to be paid for  exclusivity should be stated to apply solely  for the exclusivity period and does not  amount to payment towards the deal.

Conclusion

A LOI is capable of presenting difficulty for  parties in varying degrees, all of which  emanate from the way it is drafted. The rules  around construction of LOI are not clear-cut.  Therefore, getting it right requires finesse  and art-like drafting in order to carefully  cover the basics while remaining non 

committal as in a binding contract.

About Niccom LLP

At Niccom LLP, we advise on Mergers and  Acquisitions, and we understand the  intricacies of deal structuring. We are happy  to advise you on structuring and initiating  that deal through a LOI, or the effect of  breaking off negotiations initiated by a LOI.  

We are a full-service firm comprising of young and innovative legal minds. We provide legal  and compliance services to clients cutting  across different sectors and backgrounds. We  operate out of Lagos, Nigeria, but have  represented clients in transactions across  West and East Africa as well as the Middle  East.  Chike Obimma is a Partner at Niccom LLP. He  is a commercial solicitor and also holds an  M.B.A Degree. Chike can be reached via  chike@niccomllp.com.

References

1 N. Von Bismark, Slaughter and May;  Corporate Acquisitions and Mergers (United  Kingdom)

2 Jean Feriancek, What Did You Agree to in Your  Letter of Intent? (Insights, Edited by David S.  May). Accessed from Heinonline on 27 April  2020.  

3 Ibid. 

4Von Bismark (n1)

5Bignon Lebray (Neil Robertson), France,  Negotiated M&A Guide, Corporate and M&A  Law Committee, 5. Accessed from <  https://www.ibanet.org/Document/Default.aspx?DocumentUid=8105C641-A088-4C5F8C92-D8668EE10F2F> on 27 April 2020. 

6See RTS Flexible Systems Ltd v. Molkerei Alois  Müller (2010) UKSC 14 7ibid

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