Drafting Letters Of Intent Intentionally

Wednesday, January 25, 2006

Raymond Veldman, M&A Lawyer, http://

Drafting Letters Of Intent Intentionally (To Say What You Mean)
Abstracted from: Letters Of Intent - ­Look Before You Leap
By: Raymond Veldman Preston Gates & Ellis, Irvine (Orange County), CA
M&A Lawyer - Vol. 9, No. 5, Pgs. 11-14

Are letters of intent binding? Business executives (and even attorneys) assume that letters of intent, memorandums of understanding, and similar preliminary agreements are not binding. This is a dangerous misconception, warns attorney Raymond Veldman, in light of a May 2005 federal appellate court decision. In Frazier Industries v. General Fasteners Co., the court found that a letter of intent bound the parties to negotiate in good faith toward a final agreement. Although no uniform legal standard exists, a court seeks to determine the parties’ intentions in entering into a letter of intent. The letter might be enforceable because it sets out the binding terms of an agreement or because it binds the parties to negotiate in good faith to reach a definitive agreement. Historically, courts have not enforced letters of intent if material terms are left open. Some recent decisions have tolerated open terms as long as the material ones are included. Courts examine the language and consider whether the deal has been partially performed, whether the parties have agreed on material terms, and whether the deal’s complexity generally requires a detailed final agreement. They may also consider the parties' actions and words beyond the letter of intent, as in press releases, letters to customers, or other announcements of the deal.
What purpose do they serve? Parties may enter into a letter of intent to avoid misunderstandings in negotiating the final agreement, the author explains, or to show the parties are serious about the deal. Preliminary agreements also allow them to decide on a basic understanding of the deal before starting due diligence and the time-consuming, expensive process of obtaining regulatory consents. Sometimes the buyer's financing source requires a letter of intent to obtain financing for an acquisition. A letter of intent may keep a target from entertaining competitive bids, and it binds the parties morally (if not legally) to move forward with the transaction. Often parties intend that portions of the letter, such as the confidentiality provisions, will be binding while business terms will be negotiated further after due diligence.

Drafting guidelines. The author advises drafters that the letter of intent should clearly indicate which terms are binding and which are not. Use tentative language, such as "preliminary," "proposed," and "possible." If the deal depends on future conditions, the letter may be viewed as a binding contract subject to conditions subsequent. When these conditions are met, the other party's ability to walk away from the deal is limited. To avoid this, the letter should not require performance during the period when the final agreement is being negotiated. Specify a date on which the letter of intent terminates if the parties have not reached a definitive agreement. Courts are more likely to enforce a letter that is lengthy and has detailed provisions on important terms.

Abstracted from M&A Lawyer, published by Legalworks, 150 Clove Road, Little Falls, NJ 07424.

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