LETTER OF INTENT

LETTER OF INTENT (LOI)

You may call it a letter of intent or a memorandum of understanding or a MOA or a LOI… it still serves the same purpose.

As the parties have reached an agreement on the basic terms of the transaction, they usually draft and sign a letter of intent or memorandum of understanding before proceeding to negotiate a full agreement. One argument in favor of a letter of intent is that even if it is not legally binding in Finland, it creates an explicit moral obligation which most business people will take fairly seriously. It also serves as a negotiation agenda and states the basic terms of the understanding and makes it more difficult for misunderstandings on already agreed points. If the parties want to make a binding commitment at this stage it should state so and be called a precontract. Then again: why do this, you could as well draft the final contract in such a case.

You sometimes hear arguments against executing a letter of intent: e.g. that it doubles the time of the acquisition negotiation, that it weakens the seller’s negotiating position etc. Sellers are often keen to make a LOI and have an indication of the purchase price. Sellers often feel that it is a statement of moral commitment and shows the willingness of the buyer.

The most important thing with respect to a LOI is to be sure that the document is precisely as binding or non-binding as you want. Yet, even if the letter of intent says to be non-binding, a course of conduct (true intent in Finnish practice) by the parties treating it as binding may result in a court doing likewise.

Usually a letter of intent will cover the basic elements of the transaction,

·         the price,

·         the form of payment,

·          provisions of protection e.g. escrow or pledge arrangements, important employment agreements etc,

·         provisions prohibiting the seller from negotiating offers form any other party

·         other: indemnification, non-competition, even some representations and warranties.

In case of a publicly owned company the execution of a LOI, depending on its wording, may rise an obligation to make a public disclosure at this stage. So be careful.

My experience of the Finnish M&A market is that you have to find a good balance in drafting your LOI. Too much  legal substance in it may scare off a small or medium sized  Finnish party and then again  a good LOI serves as a perfect agenda for further negotiations.