A letter of intent, or LOI, includes terms for negotiation prior to the execution of a final binding contract.
The LOI is not a legal contract and is not legally binding, except as it relates to the negotiations between the parties. An LOI may also be known as a letter of understanding, memorandum of agreement, or memorandum of understanding.
The purpose of an LOI is to outline certain terms and conditions of a proposed transaction and provide agreement between the parties as to confidentiality, negotiations, noninfringement of third-party rights, and the primary terms that are not binding until execution of final contract.
An LOI is signed and agreed to by all of the parties to a transaction as a sign of negotiation, in good faith, of the terms and conditions of a formal agreement between the parties. For example, during negotiations for the purchase of a medical practice, the parties might enter into an LOI that outlines the proposed terms of the purchase.
The LOI might also state that the physicians shall not entertain any offers from other physicians, or participate in any discussions with other parties, with respect to the purchase of the medical practice.
Usually, an LOI establishes a negotiation deadline and LOI termination date, and identifies a dispute resolution method, or location of litigation, in the event the negotiations deadlock or the LOI is breached.
Provisions of the Agreement and Duties and Obligations Created
Because a letter of intent will likely include both binding and nonbinding terms, it is important for the parties to understand the rights and obligations that may be created by a letter of intent. Below is a discussion of some of the issues to consider when negotiating and drafting a letter of intent to be sure it accurately reflects the intention of the parties.
The first portion of a letter of intent should accurately and succinctly define the parties to the letter, summarily describe the proposed transaction, and provide an overview of the binding and nonbinding provisions of the letter.
In the Sample Letter of Intent form, it is expressly provided in this introductory section that the letter as a whole and paragraphs 1 4 of Part One in particular, do not and shall not constitute a legal and binding obligation . . .. This means that, as to the Definitive Agreements, the form letter is merely an agreement to agree. Courts have consistently held that an agreement to agree is not binding on the parties. As to the method of negotiating and preparing the definitive agreements, including confidentiality obligations, due diligence, deposit payments, etc., those terms should be made binding and are provided in Part Two of the form letter. Each of the sections of Part One and Part Two are discussed below.
Part One: Nonbinding Statement of Understanding
Proposed Transaction. This section describes the proposed transaction in more detail, but should make the entering into of any definitive agreement subject to conditions applicable to the transaction. Typically, due diligence, financing, and compliance with applicable laws are three conditions to entering into the definitive agreements.
Consulting Agreement; Non-Compete; Board Seat. The form letter contemplates the acquisition of all of the outstanding stock of a closely held corporation. Because of the selling shareholders experience in the industry, the acquirer intends to retain them as consultants for a specified period of time so long as they are willing to enter into a non-compete agreement. Obviously, this will not be the case for every transaction, but demonstrates the issues that can be covered by a letter of intent, and serves as a model if this situation did arise.
Preparation of Definitive Agreements. Variations of this section should be included in every letter of intent. It provides a general description of the method by which the parties will negotiate the definitive agreements and the general terms of those agreements.
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