From a legal perspective, the sale or acquisition of a company is a highly complex and demanding process that needs to be carefully planned and coordinated. In this context, the letter of intent (LOI) plays an essential role. As a pre-contractual document, it sets out the intentions and objectives of the parties and outlines essential key points of the deal without being binding. Further negotiations are ultimately conducted based on the LOI, so both parties must carefully draft and analyse the letter of intent. To protect the disclosed company-relevant information from competitors, a non-disclosure agreement (NDA) is usually signed in advance.
The German law firm Schlun & Elseven Rechtsanwälte offers skilled and committed legal advice. Our lawyers, specialising in German corporate law and mergers & acquisitions, have extensive experience in M&A transactions and drafting contractual agreements. Thanks to their expertise, our lawyers ensure that the letter of intent fulfils all legal requirements and considers your interests appropriately. On request, we can also draft a non-disclosure agreement to ensure the confidentiality and fairness of contract negotiations. Contact us today to benefit from our expertise.
Relevance of the Letter of Intent
Although the letter of intent is generally not binding and, therefore, has no independent legal force, it is an important milestone in the M&A process. First, it signals a fundamental willingness to conclude a contract with the other party in the future. In contrast to the offer, the letter of intent does not constitute a claim to the conclusion of the intended contract; a non-binding clause is often explicitly included to safeguard this.
In addition to the declaration of willingness, the letter of intent fulfils several other functions:
- Definition of key points,
- Presentation of the basis for negotiations,
- Assurance of certain obligations.
Even if the letter of intent is not binding regarding the conclusion of the contract, it contains obligations such as confidentiality and exclusivity agreements that serve to safeguard the interests of both parties. It is essential to ensure the highest level of confidentiality, particularly regarding the internal company information disclosed. A separate confidentiality or non-disclosure agreement can be concluded in addition to the letter of intent.
Drafting and Content of the Letter of Intent
Although every M&A transaction is individual and the aspects to be negotiated are therefore also unique, some mandatory criteria must be observed when drafting the letter of intent. First, it should be noted that the term ‘letter of intent’ does not have to be explicitly mentioned in the document itself for it to constitute such a letter of intent. Particularly internationally, there may be different or additional terms. Only the content, not the title, is decisive for the legal categorisation of a document.
In addition to the detailed and specific designation of the transaction, such as the sale of a company and the naming of the parties involved, the following questions must be addressed in the letter of intent:
- What agreements have been reached so far?
- What further checks and verifications should be provided?
- At what intervals and to what extent should further talks take place?
- By when should an agreement be reached?
- What points have the parties involved not yet agreed on?
- Under what mandatory conditions will the transaction take place?
- What financing structure has been agreed?
In a letter of intent, aspects that have already been determined can be specified in concrete, legally binding terms (so-called “hard LOI”). If no agreements have yet been reached or if the parties do not wish to definitively commit to any of the legally relevant aspects, this is referred to as a “soft LOI.”
Joint Letter of Intent | Memorandum of Understanding
A memorandum of understanding (MoU) exists when the seller signs the buyer’s letter of intent, signalling its consent, or when the parties jointly draft such a document. The purpose of this is to record the results of the negotiations to date as an “interim result”. This document has the function of preparing the main contract, as there is already agreement on key aspects of the transaction. The memorandum of understanding, therefore, has a more substantial binding effect than the letter of intent, even though it does not grant any entitlement to the conclusion of the main agreement.
Compensation for Breach of Contract Negotiations
As the letter of intent signals that a contract is to be concluded and extensive negotiations, a due diligence review and possibly concessions from both sides have usually already taken place, breaking off contract negotiations can lead to a claim for damages.
The German law provides for the framework conditions of culpa in contrahendo, Section 311 (2) of the German Civil Code (BGB). However, a liability for damages only arises if the contract negotiations are broken off without good reason. If the negotiations have failed because the parties cannot reach an agreement, there is no question of the contract negotiations being broken off for damages. Irrespective of this, the parties can agree on a break-up clause during their negotiations. This is usually recorded in the letter of intent. The break-up clause is an agreement that allows the aggrieved party to demand reimbursement of costs if the contract negotiations are broken off. In this way, the parties gain additional liability and security.
Practice Group for M&A
Practice Group for M&A
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