Transactions such as the sale of companies, stocks and shares, mergers, acquisitions, etc. require substantial investment in terms of time and resources for them to be completed successfully.
Before signing the corresponding contract, the parties need to ensure that this investment and negotiations are fruitful. One of the most appropriate instruments for this purpose is a Letter of Intent (also known as a Memorandum of Understanding).
As its name suggests, this document is normally written as a letter that one party sends to the other, stating their intention to carry out a transaction and applying in good faith their best efforts to achieve a successful negotiation.
There is no standard format or a set of minimum requirements for a letter of intent. The parties are free to include those clauses they deem convenient in each case.
In practice, some of the clauses that are usually included in the letter of intent are:
General information of the transaction (nature, parts, price, etc.).
- Indication of the non-binding character of the letter (certain clauses such as confidentiality, exclusivity or applicable law should be excluded).
- Realization of best efforts to reach a final agreement.
- Points to check and / or clarify before concluding the transaction (usually through a Due Diligence).
- Negotiations plan (meeting dates, document submissions, etc.).
- Confidentiality of the information exchanged.
- Exclusivity of negotiations (commitment not to negotiate with third parties with the same purpose).
- Applicable law and legal jurisdiction for possible disputes.
- Invitation to sign the letter by the recipient (stating the agreement with its content).
Once the letter of intent is signed, the obligation of the parties to conclude the transaction in question is not yet in force, as the letter of intent does not have the binding effect of a contract. However, it does establish a commitment between them, among other types of conduct, to negotiate in good faith, to make their best efforts to reach a final agreement, to maintain confidentiality of the information, etc.
Another important issue is the possible liability of the party that withdraws from signing the transaction. As indicated above, at that stage there is no obligation for the parties to formalise it. Indeed, this is something that may happen if a party is informed that the results of the Due Diligence are unsatisfactory. The decision to cancel the transaction is justified in this case and that will not give rise to liability. However, in the case that there is bad faith or misconduct by one of the parties, and the aggrieved counterparty can demonstrate this, then he may be entitled to compensation for the expenses borne as well as for the expectations which have been frustrated.
At Martí & Associats we can advise you on the preparation of the letter of intent, as well as provide all the necessary legal support at each of the stages of the transaction to be carried out.
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.