In the second of a two-part series, we look at the terms of an LOI. To understand more about the Letter of Intent, check out Part 1 here or download the full guide using this link:
Following on from Part 1 of our article “Letter of Intent for Searchers: What You Need To Know”, outlined below are terms we would ordinarily expect to see in an LOI:
1. Legal effect
This clause should clearly set out that the LOI is not intended to have legal effect, save for certain exceptions such as Confidentiality, Exclusivity and Governing Law & Jurisdiction (discussed below).
2. Proposed transaction
A simple clause stating your intention as buyer will suffice. For example, that you intend to purchase the entire issued share capital of the target business from the seller(s) subject to the terms of the LOI.
3. Consideration / Price
This is where the purchase price and consideration structure should be set out. The aggregate price should be stated clearly followed by a summary of how this will be apportioned in the consideration structure. Is it a straight acquisition for cash on completion or are there deferred elements such as deferred consideration or earn-outs that need to be specified. Details of any working capital adjustments should also be provisioned, including whether you’re closing on Locked-Box or Completion Accounts basis.
Subject to the structure of the transaction, you may wish to include additional wording to state that the target business is being acquired on a debt- and cash-free basis and that the purchase price is subject to due diligence.
4. Conditions
Continuing on the same theme, this provision sets out the conditions to which the transaction is conditional on. We would ordinarily expect a re-iteration that the transaction is conditional on a proper due diligence exercise taking place and there being no material adverse changes to the target business following the signing of the LOI.
We would additionally expect this clause to contain any transaction-specific elements, such as a requirement for certain seller(s) or members of the management team to enter into new service agreements or post-completion restrictive covenants. Care should also be given to any regulatory or legal requirement, such as FCA authorisation or Secretary of State approval under the NSIA.
5. Share purchase agreement (“SPA”)
Responsibility for providing a first draft of the SPA will generally be set out here, noting that it is generally expected that the buyer’s solicitors will prepare this.
In addition, this clause will ordinarily state that the SPA will be drafted on the terms of the LOI and can additionally provide clarity on terms such as limitations on liability (including timing for bringing any warranty claim). It may be sensible to ensure wording is included to the effect that any warranties, representations and covenants in the SPA will be customary.
Providing details like these should expedite the SPA-drafting process by clarifying certain provision that can take up significant time if left for negotiation later on.
6. Confidentiality
This clause sees the parties agree that the contents of the LOI are confidential and won’t be shared with third parties (e.g. rival bidders) unless otherwise agreed in writing or required by law.
This must be a legally binding term in the LOI to ensure it is enforceable in the event that the seller(s) share the terms of your deal with other prospective buyers after the LOI has been signed in the hope of securing a better deal for themselves.
7. Proposed closing timeline
In order to focus minds and provide clarity on the timings for the transaction, the parties may wish to agree a target completion date to work towards.
An indicative timeline can also be added setting out the specific transaction steps, for example the target number of weeks that the parties will conduct due diligence and how long will be allotted for the preparation, review and finalisation of the key transaction documents.
8. Exclusivity
Given the time and costs involved in conducting a thorough due diligence process, you will want to ensure that you have exclusivity rights ensuring that the seller(s) can’t enter into negotiations with third parties in relation to the sale of the target business.
This clause re-affirms the parties’ commitment to the acquisition process and provides breathing space in which you can make further investigations and enquiries with the seller(s) sole attention. We would usually expect to see the target business provide an indemnity in respect of any costs incurred by the buyer in the event of any breach of this provision.
The timings for exclusivity are to be agreed between the parties, but we would ordinarily expect this to be between sixty and ninety days to accommodate sufficient time for due diligence and the preparation and negotiation of the transaction documents.
As per the Confidentiality clause, we would again expect this to be legally binding so that, in the event of a breach, you could enforce the indemnity.
9. Costs
If there has been an agreement between the parties in respect of the payment of costs, this should be set out here. Although we would normally expect each party to bear its own costs in relation to the transaction, it is not uncommon to see agreements in which one party agrees to bear certain costs (such as a proportion of the costs incurred in relation to due diligence or the agreement of any financial documents).
Again, we would expect this to be legally binding so that the parties have financial certainty.
10. Boilerplate
This is legal jargon for the “boring” (but nevertheless important) provisions that you see in most legal documentation that help to govern the way in which the agreement operates.
Here, we would expect to see clauses outlining provisions relating third party rights, variation of the LOI and governing law.
11. Expiration
This clause simply sets out the date that the offer will expire if not accepted and is another helpful provision to focus the attention of the seller(s) and prevent any undue strategic delay.
Other key drafting points to note
It is important that the LOI is headed so it is clear that its contents are confidential. A simple statement above the addresses stating “Strictly private and confidential” should be sufficient to prevent the seller(s) from parading the LOI in the hope of attracting a better offer.
In addition, we would generally expect the LOI to be:
- Addressed to the target company, not the selling shareholder(s); and
- Sent by the proposed buyer,
in order to ensure that the correct parties are committed to the terms of the LOI that are stated as being legally binding.
Next steps
The LOI is an important step on the road to acquiring your target business and, if done well, it will provide the re-assurance for you to carry out more thorough negotiation and due diligence before committing to formal legal agreements.
We at Fox Williams are happy to provide pro-bono support and guidance for Searchers in the LOI process. Please get in touch with the authors if you would like more information.
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