Canada: Letters of Intent – Part II

Last Updated: February 25 2017

Introduction

This is the second of two Practice Guides discussing the use of Letters of Intent in M+A transactions, particularly private M+A transactions, and some issues and considerations in relation thereto. The first Letter of Intent Practice Guide provides an overview of the use of Letters of Intent and their use. This Practice Guide summarizes matters often included in a Letter of Intent.

How Much Should be Included in a Letter of Intent?

The first Letters of Intent Practice Guide discusses strategic considerations regarding how much to include in a Letter of Intent, as compared to leaving certain issues to be negotiated as part of the Definitive Agreement. It also includes advice regarding the extent to which parties should retain assistance of legal counsel before finalizing and agreeing to a letter of intent, even where most of the provisions may be expressed to be “non binding.”

What Matters Are Typically Included in a Letter of Intent?

Letters of Intent often include:

  • The non-binding agreement of the parties regarding the amount of the Purchase Price (often subject to a price adjustment provision) and the manner of payment (e.g. payable in cash, securities of the acquiror, or a combination thereof), as well, in most cases, as the timing of payment (e.g., payable in full at the time of Closing, or whether some portion may be deferred and payable post closing (other than under an escrow or holdback), and if so what amount or percentage may be deferred (and, in such case, in some cases the Letter of Intent may address any security that is intended to secure the deferred portion of the purchase price). In some cases a Purchaser may be reluctant to agree, even on a non-binding basis, to some of these terms, possibly including the total purchase price, prior to completing its due diligence. In some such cases, Letters of Intent specify agreement upon the agreed upon terms based on certain stated key assumptions to be verified by the due diligence process (e.g. an assumption that the target company has no “indebtedness”).
  • The structure of the proposed Acquisition transaction (e.g. whether the transaction is intended to be an asset purchase or share purchase). In some Letters of Intent, however, the Purchaser may specify that it retains flexibility to change the structure, on a mutually agreeable basis, for example, to reflect tax considerations.
  • Whether, in addition to the basic purchase price, there is intended to be any earn out under which an additional purchase price may potentially be paid depending on achievement of agreed upon specified agreed upon milestones over some agreed upon specified post closing period (and, if this is applicable, the Letter of Intent likely will often specify, in less technical detail than will ultimately be specified in the Definitive Agreement, the agreed upon milestone thresholds).
  • Whether there is intended to be any purchase price adjustment, such as a working capital adjustment, and if so, it is not uncommon for the Letter of Intent to specify a proposed base or target amount of working capital (e.g., based on preliminary information) (e.g. based on information in a Confidential Information Memorandum that may have been provided to the Purchaser by a target company’s financial advisor).
  • The proposed deadline, or anticipated date, for closing (often reflecting “wishful” thinking on the part of both parties) and also usually a “drop dead date” reflecting a deadline by which, if the parties have not entered into a Definitive Agreement, any exclusivity obligations cease to apply and the parties will discontinue negotiations (unless they agree otherwise).
  • The intention of the parties to cause their respective legal counsel to commence preparation of a draft Definitive Agreement and to negotiate the terms thereof. In some cases, this is intended to follow after a further period during which the Acquiror is to conduct due diligence. In some cases, Acquirors seek to specify that their legal counsel is to prepare the initial draft of the Definitive Agreement (or the Definitive Agreement and other related transaction documents).
  • Although generally not expressed as legally binding, Letters of Intent usually include features that are legally binding, most notably:
    • Exclusivity – A no-shop covenant by the target company prohibiting the target company from soliciting other potential acquirors or negotiating with other prospective purchasers for a limited period.
    • Access – A general covenant (which can be short and simple) pursuant to which it is agreed the Purchaser will be permitted access to the target company and its books, records and documents. In many cases, however, the Purchaser is restricted in the ability to contact employees of the target company without express approval of the target company. (In some Letters of Intent, the access covenant is included as one of the covenants that is expressed to be binding. In others it is instead part of the non-binding provisions).
    • Confidentiality – Letters of Intent often include covenants of the parties to not disclose information regarding the proposed transaction and, if there is not a separate Confidentiality or Non-Disclosure Agreement in place, obligations (e.g. of the Acquiror) not to disclose confidential information.  If there is no Confidentiality or Non-Disclosure Agreement in place, the Letter of Intent should include appropriate provisions ensuring that the Purchaser may not disclose or use (except for purposes of assessing and completing the proposed Acquisition) confidential information it may obtain as part of its due diligence.
  • Some Letters of Intent address the following additional matters, but these are generally less common:
    • Restrictive covenants regarding actions the target company may take between the date of the Letter of Intent is entered and termination of the Letter of Intent (or the Definitive Agreement being entered into).
    • Restrictive covenants restricting the Acquiror from soliciting employees, customers or suppliers of the target company.
    • Certain intended key Conditions Precedent for completion of the proposed Acquisition (or specifying that the Definitive Agreement will include specified Conditions Precedent). For example, where applicable, an Acquiror may wish to expressly specify that the completion will be subject to it obtaining financing. As these typically are negotiated as part of the Definitive Agreement, this is likely not strictly necessary, except perhaps to help make clear that the Letter of Intent does not give rise to any binding obligation to complete the proposed Acquisition and to record that the parties have reached agreement on at least some of the conditions that must be satisfied before they are wiling to be bound to complete the transaction. To the extent that the parties can identify key regulatory or third party approvals, authorizations and consents that will be required, which may take a considerable time to obtain, it may be desirable to expressly refer to obtaining such consents as a Condition Precedent and also make reference to the parties making application for such consents, perhaps even prior to the Definitive Agreement being entered into.
    • Some Letters of Intent include certain representations and warranties (e.g., regarding title to the shares to be sold under a Share Purchase transaction), but that is not very common. Some Letters of Intent alternatively specify that the Definitive Agreement will contain representations and warranties that are “customary” for the type of transaction. Some instead specify that the Definitive Agreement will include certain representations and warranties which are specified on a non-exhaustive basis.
    • Some Letters of Intent for Asset Purchase transactions refer to the major assets being acquired and liabilities the Purchaser is agreeing to acquire (although this may not be determined until the Acquiror finishes its due diligence), and any significant assets that the parties agree are excluded. In a Share Purchase transaction, if applicable, any major assets that one intended to be disposed of prior to Closing, or any material liabilities that are to be repaid before Closing, may be specified. In some cases, the Letter of Intent may seek to address the allocation of the purchase price among asset classes, but this is often left to the Definitive Agreement.
    • As noted above, in some cases the parties seek to reach agreement or some other key deal structure matters, such as escrow or holdbacks,  guarantees or indemnification obligations and indemnification Caps or break fees. In many cases, however, these matters are left to be negotiated as part of the terms of the Definitive Agreement.
    • Letters of Intent in some cases either confirm that each party is to bear their own expenses in connection with the proposed transaction or, in some cases, may contemplate an Acquiror agreeing to pay for a portion of a target company’s expenses (which, if applicable, should likely be one of the provisions expressed to be binding). Some Letters of Intent address responsibility for payment of broker’s fees.
  • As a general comment, like Acquisition Agreements, Letters of Intent are not standard “off the shelf” precedent documents, and matters covered (or not covered) and terms and conditions included, vary considerably. Often Letters of Intent may, at least initially, be prepared without involvement of legal counsel. However, it is strongly recommended that Letters of Intent be prepared with the involvement and assistance, and with appropriate legal advice obtained from, legal counsel.

Do I Need a Lawyer to Prepare or Review My Draft Letter of Intent?

This issue is discussed in the first Letters of Intent Practice Guide.

However, we recommend that parties (particularly target companies or target company shareholders) have legal counsel review and comment on a draft Letter of Intent and provide advice before it is finalized or executed.  As noted in that Practice Guide, among other factors to be considered:

  • Legal counsel should provide advice regarding whether the Letter of Intent in fact achieves the parties intentions regarding only setting out a non-binding expression of intent, rather than a binding mutual agreement that is intended to be supplemental by a subsequent Definitive Agreement.
  • Despite reflecting only a non-binding agreement regarding certain terms, some of those terms (e.g., complicated purchase price, earn out or other concepts) may require greater technical precision in drafting to ensure the intention of both parties is correctly captured.
  • There are strategic considerations in relation to the potential impact of decisions regarding which items potentially should be included in the Letter of Intent, including risks that a proposed Acquisition transaction may prematurely get “bogged down” or derailed attempting to negotiate specific deal points, and the potential impact on negotiation of other key terms and conditions to be included in the Definitive Agreement.

Any other Useful Tips or “Hacks”?

One concept we have seen that can be useful for Vendors is to include in the Letter of Intent a provision which provides that, if either party has reason to believe the other party has requested or is seeking or will seek a material change to the deal terms outlined in the Letter of Intent, other than as may be reasonably required to address any due diligence matters identified after execution of the Letter of Intent, they may give notice to the other party requesting the other party affirm that the other party will not request or seek any material change to the deal terms outlined in the Letter of Intent (other than as reasonably required to address due diligence matters) and the exclusivity covenant will terminate if the Acquiror fails to provide such affirmation within a specified time (e.g. two business days).

Any Last Advice?

Just repeating the comment noted above, which is worth emphasizing: Letters of Intent are not standard form “change the name” precedents. The terms that are included in Letters of Intent vary considerably and are (or should be) the subject of negotiation. The appropriate matters to include in a Letter of Intent, or seek to negotiate, can or should vary depending on the facts and circumstances of the particular proposed Acquisition.

And of course, ask a good lawyer for advice.

This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Contact the Author?
Click here to email the Author
In Association with
In Partnership with
Other Canada Advice Centres
Competition and Antitrust
Labour and Employment
Intellectual Property
More Advice Centers
Useful Resources
An Act to provide for the general regulation of trade and commerce in respect of conspiracies, trade practices and mergers affecting competition.
Regulations Respecting Notifiable Transactions Pursuant to Part VIII of the Competition Act.
The Regulations Respecting Anti-Competitive Acts of Persons Operating a Domestic Service.
An Act respecting investment in Canada.
The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.
The Competition Tribunal is a specialized tribunal that combines expertise in economics and business with expertise in law.
Our Mergers, Acquisitions + Financing team draws upon their Canadian M&A legal experience and shares legal insights, from the essentials for novices to more advanced concepts for seasoned dealmakers.
Tools
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions