Because LOI's are often semi-formal documents, parties will often seek to craft the document themselves. Certain risks, however, can potentially be created without careful crafting of the document. (It is this reason that we recommend at least running your LOI past counsel prior to execution.)

Principal Risks of a Letter of Intent

Except for certain limited provisions as discussed below, the parties to a proposed transaction usually intend that their letter of intent will be non-binding in the absence of a definitive purchase agreement. Creating an unexpected binding attribute is a risk that parties should avoid through careful crafting and legal review.

From a legal perspective, a contract is formed when two parties entered into a mutual agreement and there is evidence of that agreement.

There are certain actions, errors, or omissions that have historically triggered this interpretation in the courts. Some common issues include:

• The Parties Actions.

If the seller ceases to negotiate with others, no longer pursues other purchasers, or takes other steps indicating their agreement, there is potential for interpretation as a binding purchase contract. Further, if the seller were to make public announcements regarding the transactions, completes public filings, or takes other steps, it may be interpreted that the LOI is actually a binding contract to purchase.

• No mention of a Definitive Purchase Agreement.

Without language indicating that the LOI is subject to a definitive purchase agreement, parties may interpret the LOI as an actual binding offer to purchase with a corresponding legal obligation.

• Completeness of Terms.

In many cases, parties will seek to hammer out all of the principal terms of a transaction in a Letter of Intent. Absent language to the contrary, an LOI with terms sufficient enough to complete the transaction can in certain cases be interpreted as a binding document.

A Few Tips to Protecting Yourself

Use Protective Language.

The LOI should contain specific language that indicates that the LOI is subject to further negotiation and the execution of a definitive purchase agreement. An example that is commonly found in LOI's is:

This letter of intent is not intended to be a binding agreement, but rather a basis for negotiating a final, definitive agreement among the parties containing the terms of this letter of intent, as well as other terms and conditions to be determined. No party will rely on this letter of intent as binding, nor will any party be bound unless and until a final agreement has been signed and delivered by all parties.

This letter of intent does not include all the essential terms that are expected to be included in the definitive agreement. Further negotiations among the parties are contemplated before a binding agreement will be prepared, but no party shall be bound to continue negotiations, which may be terminated by any party at any time for any or no reason. Efforts by any party to obtain financing, or take any actions in contemplation of a final agreement, shall not be deemed evidence of intent of any party to be bound by this letter of intent.

The performance by any party before signing a final agreement of any act that may be included in the final agreement shall not be considered evidence of intent by any party to be bound by this letter of intent.

Always Indicate Non-binding Nature

Any releases, filings, and transaction documents should clearly indicate the non-binding nature of the LOI and that it is subject to review and execution of a definitive purchase agreement.

But Shouldn't There Be Some Binding Aspects to an LOI?

Yes. There are certain portions, or matters, of an LOI that you will likely want binding. Further, those binding mattes ought to survive termination of the Letter of intent. The include:

• Confidentiality.

In many cases parties will have a non-disclosure agreement ("NDA") in place prior to disclosing material information. However, it makes sense to reiterate the confidential nature of the proposed transaction and data that will be disclosed. Further, parties may wish to discuss whether or not public disclosure of the issuance of the LOI, or even the disclosure of "talks," is allowed prior to closing. There is little reason for such information not to remain on a confidentiality agreement post termination of the LOI.

• Preliminary due diligence.

The Letter of Intent often reviews and sets forth the manner in which due diligence shall be conducted. Arrangements that may have been entered into during due diligence might potentially survive termination. For instance, if there is a "break-up fee" associated with due diligence, the purchasing party will want this matter to survive termination.

• Jurisdictional Matters.

A LOI will often make mention of Jurisdiction and dispute procedures should something go wrong. These clauses will typically survive termination as well.

Conclusions

Letter's of Intent are common in a good portion of M&A or business transactions. They serve a very valuable role in both protecting parties, while establishing the initial terms, conditions, and ground rules leading up to a successful transaction. As with man things, the caveat is that you shouldn't hesitate to request legal review to ensure you are not exposing yourself to any undue risk.