Letter of Intent

A Letter of Intent is a document that records the key points of a planned deal. It is usually non-binding and serves as a shared basis for further negotiations. Points such as price expectations, timeline, and exclusivity are outlined here early on.

In substance it should cover, alongside price and the pricing mechanism, the transaction perimeter, the intended structure as a share or asset deal, the treatment of net debt and working capital, the definition of debt-like items, the outline of the warranty package, the scope of due diligence, the approvals required and the seller's future role. The more precisely these points are recorded here, the less room remains for later renegotiation, which is why care at this early stage matters economically. Legally the document is predominantly non-binding but regularly contains individual binding elements, in particular exclusivity, confidentiality, cost allocation and choice of law. That separation should be stated expressly.

It should also be noted that even a non-binding document can create pre-contractual obligations, so breaking off negotiations without good reason can give rise to claims under the principles of culpa in contrahendo. The terms letter of intent, memorandum of understanding and term sheet are used largely interchangeably, with the term sheet usually shorter and closer to bullet form. Sellers should bear in mind that a very detailed letter of intent takes time but makes later renegotiation considerably harder. Anyone who records only the price and leaves everything else open negotiates those points later without competition. An express provision on the further process with deadlines for diligence, draft agreement and completion is equally advisable, because experience shows a process without a timetable slows down once exclusivity has been granted.