The letter of intent in a business takeover
A business takeover ultimately involves concluding a purchase agreement. A whole process precedes this. In the preliminary phase, it is possible to conclude a letter of intent. In this article, I will tell you more about this.
The purpose of a letter of intent
With a letter of intent, the potential seller and buyer record that there is mutual serious interest in having a transaction take place. Furthermore, the outline of a transaction is usually already outlined. It states what exactly will be sold as part of the transaction. Entering into a letter of intent is not mandatory. Such an agreement is usually concluded at a stage when the buyer has already been able to form some idea about the company, but no extensive due diligence has yet been carried out.
A letter of intent may already state the intended price and the assumptions and valuation method on which the price is based. It can also include a timeline, including an intended date for the company to become for the account and risk of the buyer.
To what extent is a letter of intent binding?
To what extent a letter of intent is binding depends on the content of the agreement. For example, the agreement may include a provision regulating which provisions are binding and which are not. Sometimes a letter of intent is used to already steer strongly towards the conclusion of an acquisition agreement. It is also possible that the intention agreement is precisely meant to record that the parties are interested in exploring the possibilities of a transaction, but that there is no or virtually no commitment to reach a takeover agreement (i.e. that the parties are free to walk away from the negotiations).
Sometimes a letter of intent also includes a confidentiality clause. It makes sense to include that the agreements on this are binding. A non-disclosure agreement can also be fine in a separate document. You can read more about the confidentiality agreement in “Commercial contracts: ‘the non-disclosure agreement'”.
I recently came across a provision in a letter of intent which stipulated that the seller will provide the buyer with all information that is or could be relevant to the buyer. This provision emphasises the seller’s duty of disclosure, while the buyer’s duty to investigate is not mentioned. Should a buyer later believe that what was bought does not conform to the contract, such a provision may play a role in assessing the extent of the duty of disclosure and duty to investigate.
Exclusivity
A letter of intent usually includes a binding provision on exclusivity. A buyer will incur costs as part of due diligence and will prefer that the seller not negotiate with other interested parties in the meantime. It is common to agree on a fixed term of several months, as due diligence and contract negotiations usually take quite some time.
Advice on letters of intent
Thus, a letter of intent outlines the contours of an envisaged transaction and indicates the parties’ serious interest in making a transaction happen. A letter of intent may contain legally binding provisions, but this depends on the content of the agreement. Usually, provisions on exclusivity and confidentiality are binding. Due to the fact that letters of intent can contain binding provisions, it is advisable to seek advice from a specialist in the field of company takeovers at that stage of the business acquisition process.
If you have any questions about company takeovers or would like guidance in an acquisition process, please contact Peter de Graaf of LVH Advocaten.
