Nature and Benefits of Letters of Intent
A letter of intent (LOI) is a preliminary document usually prepared by a purchaser, in which the intention of the parties and the proposed course of action towards the negotiation and completion of a deal is captured and jointly executed. It may also be called a ‘Heads of Agreement’, or a ‘Memorandum of Understanding’. The purpose is to identify deal parameters, agree on them and chart the way forward for the negotiation of material terms and completion. It is in our view, a framework document to guide parties in negotiating and completing a deal.
From a purchaser’s perspective, the LOI is important because it gives some assurance that negotiations will proceed and where the LOI contains an exclusivity clause, there is further assurance that the vendor will not shop the deal around to other potential buyers during the exclusivity period. Even where the LOI contains a ‘go shop’ provision, the Purchaser can rely on the assurance of receiving a breakup fee in the event that the deal is shopped to another buyer. Thus, the purchaser has the comfort to expend resources on due diligence (DD) and the drafting of a purchase agreement. For the vendor, an LOI shows some form of seriousness on the part of the purchaser to proceed with the deal especially where the LOI contains a break fee clause.