Canada: Key Legal Issues And Considerations When Preparing A Letter Of Intent

Last Updated: December 2 2016
Article by Troy Pocaluyko, Rob Wortzman, Joel Fraser and Charlie Malone

Although not required for the completion of merger and acquisition (M&A) transactions, a letter of intent ("LOI") generally serves a critical role by setting out and documenting the principal terms of the transaction and facilitating the negotiation of the definitive purchase agreement between the parties to the transaction.  Among various other matters, an LOI will typically identify the proposed parties to the transaction, the assets or shares to be acquired, the purchase price, the form and timing of payment of the purchase price, the anticipated closing date, any important conditions of closing and certain confidentiality exclusivity obligations.

At Wildeboer Dellelce LLP, we regularly assist business owners throughout the process of purchase and sale transactions. From this extensive experience, we have prepared the following overview of some of the most important legal issues that should be considered when negotiating and drafting an LOI. 

Enforceability 

Typically, LOIs are of a non-binding nature and do not require the parties to conclude the transaction on the specified terms set out in the LOI. However, a party may want to include binding terms, even if a definitive agreement is not signed, such as confidentiality, exclusivity (see below) and responsibility for expenses. Creating an unintentionally binding agreement can be a significant risk of using an LOI. Courts have held LOIs enforceable based on the parties' intention to be bound and the document being sufficiently detailed as to make it not void for vagueness and uncertainty. To avoid this issue, you should expressly state your intention that the LOI be non-binding (assuming that is in fact the intent) and avoid the use of contractual language. Additionally, it is advisable to include provisions that the parties intend to enter into a definitive agreement and specify any further conditions that are required for the transaction to be completed. 

Share vs. Asset Sale 

An LOI will typically but not always summarize the proposed structure of the transaction, including whether the parties are contemplating a sale of shares or assets. Where the LOI contemplates a share sale, the buyer should specify its intention to purchase all or only some of the target's issued and outstanding shares. It is also important to confirm the classes of shares that exist and remain issued and outstanding. In contrast, where the LOI contemplates an asset sale, the assets to be acquired, the liabilities to be assumed and the purchase price allocation should be specified. There can be significant tax implications on both the buyer and vendor, so the purchase price allocation between assets should be carefully considered. In addition, the LOI should stipulate whether any liabilities that are not being assumed by the buyer must be satisfied from the proceeds of sale. 

Commitment of Parties 

As a matter of corporate governance, each party should obtain all requisite corporate approvals of the terms of an LOI before it is signed.  This typically means that each party should obtain approval of its board of directors and, in certain circumstances, any required shareholder approval. If the transaction involves the purchase of shares and the target has multiple shareholders, you should ensure, and the LOI should expressly document, the commitment from all shareholders to sell their shares.

Exclusivity

A buyer may want to protect its interest in a transaction against any potential competitive bids or offers for the target company. This is particularly important given the time and economic investment involved in due diligence and further negotiations. To ensure that the prospective buyer has sufficient time to complete its due diligence and avoid the possibility that the seller pursues a competitive bid while the parties are negotiating the definitive purchase agreement, it is advisable to include a binding exclusivity clause in an LOI to prevent the vendor from negotiating or soliciting other offers for a given period of time following signing of the LOI. A broadly drafted exclusivity clause will help prevent the seller from soliciting any other offers or entering into negotiations or agreements with any other parties. To be enforceable, the vendor's obligation not to solicit or negotiate with a third party must be supported by consideration, which is generally considered to be the time and expense incurred by the buyer in completing the proposed transaction.

Confidentiality

Given the sensitive information contained in an LOI, the parties will want to ensure the information remains confidential. Prior to the execution of an LOI, you may have already entered into a confidentiality agreement with the other party. If so, you can ensure that the information contained in the LOI and any other sensitive information provided to the prospective buyer remains confidential by expressly subjecting its terms to the confidentiality agreement. However, if no confidentiality agreement exists at the time of signing the LOI, it is advisable to include a binding mutual confidentiality provision within the LOI.

Third-Party and Regulatory Approvals

Many transactions involve approval of parties not directly involved in the negotiations. These parties can include, but are not limited to, prospective or existing lenders, contractual parties requiring notice of change of control, and industry-specific regulatory agencies. Often a buyer will be unaware of these required approvals at the time of drafting an LOI due to the lack of a due diligence review. A broadly drafted condition of closing, including receipt of all necessary consents, will assist in addressing this lack of awareness.

Earn-Outs

When acquiring a business there may be gaps in a buyer's valuation of the target relative to a seller's expectations for a variety of reasons, including a lack of publicly available information. An earn-out provision can bridge this value gap by basing the final purchase price in part on the performance of the target business post-closing. An earn-out provision can be beneficial to the parties providing the buyer with assurances based on the vendor's provable earnings post-closing, while providing the vendor with the potential of achieving a higher sale price. Due to the complexity involved in formulating and negotiating an earn-out provision, when executing an LOI, it is advisable to merely state the parties' intent to include an earn-out provision in the definitive agreement.

Milestone and Timelines

Given the time and expenditure involved in completing an M&A transaction while still operating in the ordinary course of business, the parties will want assurances that the transaction progresses in a timely manner. An LOI should stipulate a proposed timeline for completion of important milestones, including specific dates for signing of the definitive agreement and the target closing.

Treatment of Employees

Certain key employees may be critical to the future success of a target business, making their commitment to employment post-closing important to the buyer. Employees are treated differently in a share purchase acquisition versus an asset purchase acquisition. In a share purchase, employees remain employed by the target post-closing as a matter of law, whereas in an asset purchase, the buyer must offer the target's employees new employment contracts with the buyer. Given this difference, it is recommended that you consider specifying in the LOI the parties' expectations in respect of retaining and making offers to employees.

Duty to Negotiate in Good Faith

In the common law provinces and territories of Canada, due to the non-contractual nature of an LOI, there exists no general duty to act or negotiate in good faith. You may include in an LOI an express covenant to negotiate in good faith, which will be interpreted based on the intention of both parties. However, a court would likely not find a breach of such covenant so long as the party alleged to have breached the covenant honestly believed that it did not act unreasonably during negotiations. In contrast, in the Province of Quebec, the duty to act in good faith applies to pre-contractual negotiations. 

While this is a non-exhaustive list, it highlights some important issues a buyer should consider when drafting an LOI.

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.

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.

Authors
Troy Pocaluyko
 
In association with
Related Video
Up-coming Events Search
Tools
Print
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.