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This group is for employees of strategic investors/corporates only that are involved in M&A transactions as part of an in-house M&A department, corporate development, strategy, finance function, etc.
LOI Binding or no?
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My company uses a letter of intent that does not say that it is binding, and does not say it is not binding. As a general rule, does that mean that the loi is not binding?
As a general rule, if your letter of intent (LOI) does not explicitly state whether it is binding or non-binding, it can create ambiguity and potentially lead to disputes. Typically, courts will look at the specific language and context of the LOI to determine the parties’ intent. However, to avoid any confusion, it’s best practice to clearly state in the LOI whether it is intended to be binding or non-binding.
For peace of mind and legal clarity, I recommend explicitly including a clause in your LOI that specifies its binding nature.
The answer depends on the law applicable to the LOI, which itself is an issue that is a hotbed for a dispute. The law of some jurisdictions may look beyond the wording in the LOI to ascertain whether the parties intended for the document to create legally binding relations. Other jurisdictions may look more narrowly within the four walls of the LOI and incline towards a “presumption” that parties intended for a document to be legally binding unless stated otherwise. Even if a LOI appears to be binding, there may be difficulty enforcing it if its terms are not detailed or clear enough.
Personally, I always include explicit wording to indicate whether a LOI is intended to be legally binding or not, and the extent to which certain clauses (e.g. confidentiality) is binding even though the rest of the LOI is non-binding.
My experience is that there are terms in the LOI that are legally binding (i.e. non-disclosure, exclusivity, etc.) however it is not a legally binding agreement to purchase the company. It’s necessary to get the seller comfortable with providing due diligence materials to determine if the acquisition is a viable target and a step toward negotiating a PSA.
In general, if the letter is merely an intent, then it is just that—the expression of intent to make a deal. However, in some jurisdictions, including where I come from, dealings prior to the perfection of a contract must be conducted with loyalty and good faith between the prospective contracting parties. This obligation includes collaborating in the formation of the contract, providing and obtaining information on relevant factual and legal circumstances, maintaining the confidentiality of information received, and preserving the asset that will be the subject of the future contract. When these obligations are breached, the aggrieved party may have a valid claim.
A letter of Intent express an intention to do something so making it binding contradicts the fact that it is an intention not an obligation. I have never seen a binding LOIs – I have only seen non-binding LOIs. It is important to include an expiration clause in the LOI to minimize the receiver of the LOI to take it and use it to shop in the market for a higher bidder.
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