Let’s take a quick look at what a “letter of intent” is and isn’t. I say “quick” because a complete look at the subject would turn this post into a book.
Letters of intent, often referred to in shorthand as “LOIs”, are a usual, but neither legally required nor universal, step in an acquisition or “M&A” transaction. That said, they can be used in many other types of contracting arrangements as well.
Because they’re most often conceived of in the course of an acquisition, let’s focus on an LOI in that context, a context in which they are prepared by the buyer.
It’s easy to see an LOI as a very odd document in that most of its terms, including but not limited to those pertaining to price, timing of closing, and terms of purchase and payment, are specifically set out as nonbinding. On the other hand, provisions pertaining to what’s essentially an exclusivity period running in favor of the buyer, continuing promises of confidentiality, and choice of law provisions are specifically set out as binding.
Importantly, even if specifically agreed to be nonbinding, deal term provisions set out in an LOI take on psychological importance – they become the starting point for later negotiations, and it is always harder to negotiate against an entrenched position.
More so than the few specifically binding provisions, the generally nonbinding nature of an LOI lures many sellers into make a significant strategic mistake: They fail to advocate for positions and definitions that would best be addressed up front in the LOI even if “nonbinding”, in order to avoid putting themselves in a weakened negotiating position months ahead of the preparation of the definitive deal documents.