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.
