If you are selling or purchasing a business, the first key
document that is likely to be involved is a letter of intent. This
is a document that sets out in brief terms the agreement of the
parties on the principal business terms of the proposed
transaction. It is not legally binding, with the exception of some
non-business terms. The reason for this is that it enables the
parties to reach agreement more quickly on the key business terms
without taking the time at the early stages of the transaction to
try and negotiate the more detailed legal terms such as the
representations, warranties and indemnities that the purchaser will
be asking for from the seller as due diligence proceeds and the
full legally binding transaction documents such as the Share or
Asset Purchase Agreement are negotiated.
Having noted that the letter of intent is not legally binding,
it is best to treat the letter of intent seriously and include a
level of detail which will flesh out the key business terms such as
the amount of the purchase price, how the purchase price will be
paid, whether there will be any security given for any part of the
purchase price not paid in full on closing, the specific assets or
shares being sold, what debt of the seller is being assumed by the
purchaser (if any), the scope of any non-competition covenant and
other terms of a comparable nature, so that the parties are
confident that they do have agreement on the terms which are
important to them before proceeding to invest their own time and
resources, and the time and efforts of their advisors, which will
be involved in a full transaction.
The other reason to treat the letter of intent seriously is
that, as the transaction later proceeds through negotiation of
legally binding documents, a business term set out in the letter of
intent will commonly be referenced by one party if the other party
later does want to deviate from that business term. Although the
deviation will be legally possible, there may be a trust issue if
an important business term which was specified in the letter of
intent is later backed away from without a good reason. One reason
for changing a term could be new information discovered during due
diligence or a real change in the business between the time of
signing the letter of intent and the later binding negotiations.
However, if there is no good reason, there may be a serious problem
with the trust that one party has in the other party's
commitment to the transaction proceeding on the previously agreed
As indicated, there usually are some terms of a letter of intent
which are specified to be legally binding. One of these is an
agreement of the parties to each bear their own expenses in
connection with the transaction. Another is a confidentiality
clause in which the parties agree that all confidential information
exchanged relating to their businesses and the terms of the
transaction itself will be kept confidential. Finally, it is
typical for a purchaser to ask the seller to include a binding
"no shop" clause under which the seller commits for a
specified period of time not to consider any other offers for the
business or to negotiate with any other party. A purchaser
typically does not want to proceed to invest the time and resources
which will be required during due diligence and negotiation of the
legally binding agreements without the seller committing to this
type of exclusive negotiating period.
If the parties have negotiated the key business terms of the
proposed transaction and signed a letter of intent along the above
lines, they can more confidently proceed to spend the time and
resources which will be necessary to complete the transaction with
more extensive legally binding transaction documents.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
While most are well aware that the sale of a business is generally a complex process, even sophisticated business owners are surprised by just how much cost and effort is required to complete the sale.
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