Germany: The Purchase and Sale of Companies - 7.Comments On The Letter Of Intent ("LOI")

Last Updated: 4 December 1997
The very designation of "Letter of Intent" indicates that a mere statement of intent is meant which does not include any contractual obligations. In German practice, such a declaration of intent only constitutes a communication that it is intended to conclude a share purchase agreement and that the commencement of contractual negotiations is requested as a result. Such a declaration of intent cannot give rise to any contractual obligations with regard to the share purchase agreement to be concluded at a later date.

In German practice, agreements are frequently reached which are designated as an "LOI" nut nonetheless have a legal quality of a so-called preliminary agreement. A preliminary agreement may include an obligation of one or both parties to carry out negotiations on certain conditions. Preliminary agreements may be reached at this stage, e.g. provisional payment obligations and "standstill provisions", etc. The difference between a preliminary agreement and an LOI is that no contractual claims, guarantee claims and/or compensation claims may be based on a pure letter of intent. Such claims may be derived from the preliminary-agreement, however, in particular claims for the conclusion of the final share purchase agreement under certain conditions.

The present LOI represents a preliminary agreement from a legal point of view. Detailed comments are as follows:

The specimen of a declaration of intent included in Section 1 constitutes no commitment for either of the parties. It only indicates the possibility of a purchase of shares on conditions yet to be agreed and declares the corresponding intention.

The contents of Section 1 of the LOI could be sufficient for such a declaration to be interpreted as a LOI in itself under German law. All the intentions of the buyer connected with the purchase and sale of the company are specified in Section 1. It can be clearly seen from Section 1 that the buyer intends to purchase the company and what parts of the company the buyer wishes to take over with the purchase or what is to be excludes from the purchase and sale of the company.

The individual provisions of Section 2 of the specimen are already of a pre-contractual nature. A purchase price is agreed under (a) for the shares to be purchased.

Sub-section (b) again refers to a "Closing Date". For reasons stated above, the agreement specified here under sub-section (b) can only relate to the execution date of the in rem performance transaction under German law. To this extent, sub-section (b) has already developed pre-contract obligations with regard to the payment of the purchase price for the shares to be acquired.

The parties agree to prepare audited financial statements within a certain period of time in sub-section (c). This obligation is also of a pre-contractual nature as it already has the character of a commitment. Any breach of this obligation could give rise to compensation claims by the other party.

Section 3, on the other hand, only includes references to the type of negotiations to be concluded and the conclusion of the final share purchase agreement. Neither of the parties is entitled to derive any contractual claims from Section 3. To this extent, Section 3 only has the character of a declaration of intent.

Section 4 includes a contractual commitment on the seller to support the buyer with the execution of a legal and financial "due diligence" audit, together with the consultants appointed by the buyer. The modalities of the aforesaid support are set out in detail. The seller therefore assumes certain commitments in Section 4 which the buyer is entitled to assert and enforce judicially if necessary. Section 4 is also of a pre-contractual nature to this extent.

Section 5 includes a ruling under which the buyer is entitled to withdraw his/its offer for the conclusion of a share purchase agreement on certain conditions. This is also to be regarded as a pre-contractual ruling as a legally binding offer for the conclusion of a share purchase agreement is not normally included in an LOI.

Section 6 of the specimen also includes pre-contractual obligations of the parties to cooperate and to ensure a mutual exchange of information. These obligations can also be asserted and judicially enforced by the beneficiary party if necessary. To this extent, this Section is also of a pre-contractual nature.

Sections 7-12 likewise include unilateral or multilateral action and forbearance obligations of the parties. Sections 7-12 are also of a pre-contractual nature to this extent as any non-performance of the agreed obligations can well give rise to compensation claims by the other party if necessary.

The legal venue agreed in Section 13 also indicates that the specimen is to be regarded as a preliminary contract. As mentioned above, a pure declaration of intent includes no commitments for the parties which could be judicially enforced. Judicial disputes may arise from non-compliance with commitments under a preliminary contract, however.

Section 14 also allows the conclusion to be drawn that the specimen is to be regarded as a preliminary contract. In clause 2 of Section 14, it is specifically pointed out that =A7=A7 9-14 (both inclusive) are to be regarded as binding. It is only in respect of =A7=A7 1-8 and 13 that the parties agree that a legal commitment has not been constituted and that only an expression of the intention of the parties is involved.

In summary, it can be said that the present specimen by far exceeds the contents of a pure declaration of intent in German practice and under German law. The specimen is to be regarded more as a preliminary contract.

It is customary to conclude preliminary contracts in German practice. It should be pointed out, however, that such a preliminary contract can lead to contractual claims, guarantee claims and possibly compensation claims for one and/or both of the contracting parties.

For further information please contact Dr Erich Michel, Wessing Berenberg-Gossler Zimmermann Lange, Freiherr-Vom-Stein-Strasse 24-26, Frankfurt am Maim 60323, Frankfurt, Germany- Tel: +496 997 1300, Fax: +496 997 130100.

You may also wish to read through related Wessing Berenberg-Gossler Zimmermann Lange. You can view the entire archive via the Internet on Business Monitor Online (http://www.businessmonitor.co.uk), or via your online provider by entering "Wessing Berenberg-Gossler Zimmermann Lange" and "Business Monitor" as a free text search.

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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