I recently appeared on an episode of the Private Equity FunCast: “The Art (and Science?) of the LOI” to talk deal terms with private equity masters Devin Mathews and Jim Milbery. This well-spent hour got me thinking about how confusing some of the deal terms in a Letter of Intent (LOI) must be for first time sellers. As a result, we are launching a series of blog posts that will deconstruct the LOI into easily understandable parts. In this series, we will be covering the following topics:The purchase price and how it is calculated;The structure of the transaction;Key tax issues;Key deal terms, including working capital, representations and warranties, and indemnification/escrow arrangements; andThe legal “mumbo-jumbo.”We covered much of this during the FunCast, but will take a deeper dive here with a more intense focus.The Purchase Price and how it is Calculated For most business sellers the purchase price is the purpose of the deal – cashing … [Read more...] about Deconstructing a Letter of Intent for Business Owners, Part 1
Letter of intent
Introduction This article will explore some issues concerning arbitration of disputes arising under a letter of intent (an “LOI”). Arbitration clauses are often included in the final transaction documents but are rarely found in an LOI. Although [the party (the “Offeror”) offering a deal summarized in an LOI to the counterparty (the “Offeree”)] the parties may be reluctant to burden the LOI with a dispute resolution provision, it may nevertheless be a good idea to consider whether arbitrating such disputes is appropriate.Although one can debate the advantages of arbitration, final transaction documents, especially in cross-border transactions, often provide for arbitration as a means to avoid the inhospitable courts of a foreign jurisdiction, to better ensure confidentiality, and because an arbitration award may more easily be enforceable in some countries than a foreign judgment. The same considerations apply to a dispute arising out of an … [Read more...] about Should a Dispute Under a Letter of Intent Be Arbitrated?
In almost all corporate transactions, the first piece of written documentation the parties exchange and execute (after a non-disclosure agreement) is a letter of intent or term sheet (“LOI”), which is intended to summarize the main deal points. And as many corporate transactions involve entities organized in Delaware, these documents often select Delaware as the governing law. Typically, this same LOI documentation is clearly identified as “non-binding,” as it usually represents merely the initial, tentatively negotiated business points between the main players of each side of the deal. The task is then left to outside or in-house counsel to craft the definitive agreements to memorialize the business points reflected in the LOI. Unless a particular provision is clearly identified in the non-binding LOI as, in fact, “binding” (such as an exclusivity provision), most lawyers assume that there cannot be liability if the definitive agreement differs … [Read more...] about When Is a Non-Binding Term Sheet or Letter of Intent Enforced as a Binding Contract?
Prior to entering into a definitive commercial agreement, parties often enter into a letter of intent, a term sheet or a memorandum of understanding (a preliminary agreement). Some of the provisions in the preliminary agreement may be intended to be binding on the parties (e.g., no-shop clauses) while others are not. Problems arise when negotiations falter and the prospective deal breaks down. A party that feels jilted may argue that the preliminary agreement created binding obligations that the other party did not expect. Among the potentially binding obligations that may be pressed in these situations is the duty to negotiate a definitive agreement in good faith based on the terms of the preliminary agreement.In related decisions (the SIGA decisions), the Delaware Supreme Court signaled an increased risk exposure for parties that enter into preliminary agreements. The Supreme Court established that (i) an agreement between the parties to negotiate in good faith in … [Read more...] about Assessing New Risks in Letters of Intent: Delaware Supreme Court Creates Increased Exposure by Recognizing a Duty to Negotiate in Good Faith
If you’ve been in the real estate business long enough, odds are you’ve found yourself in the following situation: You’ve signed a letter of intent (LOI) to buy or sell a property, which contains some combination of the basic deal terms (property description, price, due diligence period, closing date, earnest money, etc.) and contemplates the negotiation of a detailed, definitive purchase agreement. Then, before the agreement is actually signed, you decide not to pursue the deal—because you’ve changed your mind, market conditions have shifted or the negotiations have reached an impasse. If the other party still wants to proceed, can they force you to go through with the deal?The answer depends on the language in the LOI. In almost all cases, this preliminary document is not intended to be a binding agreement for the purchase and sale of the property; its purpose is to memorialize the terms that the parties have agreed to in principle and provide a … [Read more...] about Letters of Intent: Preliminary Negotiation or Binding Agreement?
A common form of agreement in the construction industry is the letter of intent. A letter of intent is essentially an agreement to agree. The parties are agreeing that they will work together on a project and work out the details later. But what happens when the parties fail to work out the details later?If everything goes smoothly, there often isn’t a problem. But things don’t always go smoothly. What happens when a problem occurs before the contract is finalized? Is there an enforceable contract? And, if so, what are the terms of that contract?Luckily, Illinois law does provide guidance for these types of situations. In fact, the Illinois Supreme Court, in Quake Const. Inc., v. American Airlines, Inc., 141 Ill. 2d 281, 289 (1990), outlined several factors used to determine whether a letter of intent will be binding:1) Whether the agreement is of a type usually put into writing2) The amount of detail in the agreement3) The amount of money involved4) Whether a formal … [Read more...] about Letters of Intent in Construction Industry: The How, Why and Why Not of Enforceability
In our last post, we began speaking about letters of intent and their use in negotiating the terms of construction projects. As we noted, letters of intent are not contracts, but courts do sometimes enforce them as binding, depending on what the parties intended by the document. In cases where it is evident that both parties intended to be bound, they may be enforced by a court. In cases where parties did not intend to be bound, they may not be enforced. It depends on the circumstances, though.In some cases, a court may enforce some parts of a letter of intent, but not others. This can happen in cases where parties did not intend to be bound by specific provisions of the letter, but agreed to deal exclusively with the other party, not to disclose the negotiations, or to deal with the other party in good faith. Certain types of agreements such as these can spur parties to take steps in reliance on the letter of intent, including investing money or passing on other opportunities, and … [Read more...] about Letters of Intent in Construction Project Negotiations–Pt 2
Anyone who works in the construction industry knows how important it is for everybody to have the same understanding about the terms of a project, including the materials needed, deadlines to be met, and the procedure for resolving disputes. Without a reasonable degree of certainty about these things, there is always the risk that something will go wrong and that money will be lost.Before all of the details for a construction project are hammered out in a contract, though, there is the negotiation process. Oftentimes, parties begin to take action and invest in a project before a formal contract has been reached. One tool that is sometimes used to prevent financial loss before a contract has been reached is a letter of intent. A letter of intent is a document that provides a general statement of an agreement that has yet to be finalized. Letters of intent are not contracts, though they may still be enforced in court, at least as to some provisions. Exactly how a letter of intent is … [Read more...] about Letters of Intent in Construction Project Negotiations–Pt 1
A recent jury finding in Energy Transfer Partners LP v. Enterprise Products Partners LP may have far-reaching effects in how relationships formed through nonbinding letters of intent are interpreted, specifically regarding whether conduct can negate a previous agreement between parties.In numerous documents, including a letter of intent, executed by Energy Transfer Partners LP (ETP) and Enterprise Products Partners LP (Enterprise) the companies agreed that neither party had a legal obligation to pursue a pipeline project until both parties signed a definitive agreement stating their intent to be bound to the venture. Enterprise later abandoned the project citing a lack of concrete interest from shippers and ETP filed suit after learning that Enterprise entered into a similar project with a third party. ETP argued that the parties’ conduct formed a state law partnership under Texas law and alleged that Enterprise breached its fiduciary duties.In reaching its … [Read more...] about Nonbinding Letters of Intent: Actions Speak Louder Than Words, Texas Court Finds
Art Briles, many athletes who had committed to play for Baylor University’s football team have begun to reconsider that decision. In fact, 7 Baylor recruits requested to be released from their National Letters of Intent according to a recent ESPN report. And this is not entirely uncommon. Across the country, many athletes have had second thoughts about their decision to attend certain colleges and universities. One thing is stopping them from fully committing to another school: the National Letter of Intent.The National Letter of Intent website is “a binding agreement between a prospective student-athlete and an NLI member institution.” Under its provisions, a prospective student-athlete agrees to attend the institution full time for one academic year and the institution agrees to provide financial aid for that academic year for the athlete.Similar to early decision for non-athletes, an athlete enters into an agreement with the … [Read more...] about How the Baylor Scandal Exposes Problems With NCAA and the National Letter of Intent