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. 


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.


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.


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.


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

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

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
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 (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

To Use 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.


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.


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