What is a letter of intent?

A letter of intent or a memorandum of understanding or any similar document is a statement from one party to another about the business and some legal terms of a transaction. Whatever that document is called is negotiated between the parties and eventually settled upon and will be the basis of final documents later in the transaction. A letter of intent is a very important tool to suss out a true transaction partner from a would be suitor or a straw man.

Is a letter of intent binding?

A letter of intent may be binding. A letter of intent might not be binding. Most likely parts of it will be binding like a contract, and some of it will not be binding. The business terms may not be binding upon the parties. The business terms will only be binding once they are reflected in the final documents. Certain terms may be binding even prior to the final documents. Those terms might include terms such as confidentiality, a no shop clause, which prevents either party from shopping the deal or seeking other suitors if you are the seller, and possibly a breakup fee if the letter of intent is not executed on in a final document within a reasonable period of time.

Can you cancel a letter of intent?

You can most certainly cancel a letter of intent. A letter of intent is not a final document and is not a binding deal. That being said, cancellation of a letter of intent may carry with it certain consequences. You might be required to pay what’s called a breakup fee. A breakup fee is a fee that one party will insist upon in a letter of intent that once executed binds the other party to either complete the transaction or to pay a fee. A breakup fee generally should cover the costs of consultants, attorneys, and accountants in a transaction. Other terms that may carry over and may implicate the breaching party who breaks the letter of intent may be confidentiality, non circumvention clauses, and no shop clauses.

What is due diligence?

Once a letter of intent is signed, the parties will enter the next phase of the transaction, which is referred to as due diligence. The due diligence period is a limited time period during which both parties can ask questions, receive documents, and examine the other side’s financial and corporate entity and qualify the other side for the transaction. Due diligence will come in a form of a request or several requests, which must be executed and completed and satisfied to the other party’s satisfaction. Failure to do this will most likely result in the termination of the letter of intent or the lowering of the price. Completing it is arduous, but necessary.

How should I respond to a due diligence request?

The most important way to respond to a due diligence request is to be organized. Taking all of your files in a shoebox and handing them, either electronically or physically, to the other side and thinking that you have satisfied your due diligence request is not an acceptable form of responding to that due diligence request. As a responder to a due diligence request, you should make the reading and review of the due diligence as easy as humanly possible for the reader. You want their eyes to look at what you’ve given them, check a box, and move on. You do not want to get bogged down in due diligence.

What are final transaction documents?

Final transaction documents take many forms, it depends on the nature of the transaction. If the transaction is an asset purchase agreement, then the base document will be an asset purchase agreement, as well as various assignments. For patents, trademarks, copyrights, it may involve assignment or indemnification agreements for liabilities, it may involve transfers of deeds and will have a great number of small ancillary documents to effectuate the master agreement, the asset purchase agreement. If the agreement is a merger or a stock purchase or stock exchange, the final documents might be one unified transaction document involving the transfer and buying and selling of a target company’s stock. So, the final documents will encompass the entire business terms of the deal as set forth in the letter of intent, but will go further and deeper and will eventually supersede the letter of intent.