Presenting a live 90-minute webinar with interactive Q&A M&A Letters of Intent: Strategies for Buyers and Sellers Negotiating and Structuring Preliminary Deal Terms and Conditions TUES DAY, JANUARY 21, 2014 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: B. S cott Burton, Partner, Sutherland Asbill & Brennan , Atlanta Mark D. Williamson, Principal, Gray Plant Mooty , Minneapolis The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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M&A Letters of Intent: Strategies for Sellers and Buyers Mark D. Williamson B. Scott Burton January 21, 2014
Letter of Intent • What Is It? – Generally a brief document indicating the parties’ intention to proceed with the negotiation of a definitive agreement – Contains the basic terms of the proposed deal – Typically a nonbinding document (although often containing binding provisions) – Sometimes referred to as (and perhaps formatted as ) a “term sheet,” a “memorandum of understanding” and sometimes, the seemingly oxymoronic “preliminary agreement.” 6
Attorney’s Role • Advising client on the utility of and issues relating to an LOI • Attorney should review and comment on letter of intent before it is signed – Critical to make sure binding and nonbinding provisions are drafted properly • Business people often prepare an outline or term sheet to be converted into the letter of intent • Sometimes terms that may be vigorously negotiated when lawyers are present may be conceded by the business people 7
Is a Letter of Intent Necessary? • A letter of intent is not necessary and not always desirable. • Parties can proceed directly to the drafting and negotiating of a definitive agreement without signing a letter of intent. • Alternative: Use short non-binding term sheet with basic deal terms. 8
Why Consider a Letter of Intent? • Is the client a motivated Seller or Buyer? • Is there an immediate need to begin diligence? • Is exclusivity crucial? • Is the transaction very detailed/complex? • Are approvals (e.g., from investors, lenders, regulators) needed for the deal? • Is a timeline/deadline crucial? 9
Advantages of Using Letters of Intent • Isolates and memorializes key deal points or identifies deal breakers • Provides a map and timeline for the transaction • Governs the parties’ relationship to the signing of definitive documents • Provides a vehicle for binding obligations (e.g., exclusivity, expense allocation, confidentiality) • Can be used with regulators (e.g., HSR filing), financing sources and other constituencies • Demonstrates the seriousness of the parties • Creates “moral commitment” 10
Disadvantages of Using Letters of Intent • Certain provisions can lead to loss of leverage – For Seller, exclusivity provision – For Buyer, too much detail on deal terms • May inadvertently create a binding agreement as to certain deal points along with potential liability • May create a duty to negotiate in good faith • Potentially triggers public disclosure obligation if binding • Nonbinding nature of letters of intent does not always justify the expenditure of time and money 11
Diagnosing the Desirability of a Letter of Intent When an LOI “opportunity” presents itself, consider discussing the following items with the client: • What do you hope to accomplish with a letter of intent? • Does the letter obligate your company to do or to refrain from doing something? • What do you expect the other party to do (or not do) as a result of the contents of the letter? • Could similar benefits be achieved with an alternative ( e.g., an expressly non-binding term sheet)? • How complicated is the transaction for each party? • What is the timeline/deadline for definitive documents/closing? • What is the legal budget? 12
Typical Provisions of a Letter of Intent • Form of Transaction – Stock Purchase – Asset Purchase – Merger or Reorganization • Price – Amount – Form of consideration/timing of payments (cash, stock, earnout, promissory notes, etc.) – Source of funds – Escrow – Purchase price adjustments – Special tax elections 13
Typical Provisions of a Letter of Intent (cont.) • Other Material Terms – Extent of representations and warranties – Indemnification obligations – Non-compete obligations – Key employment issues • Conditions to Transaction – Completion of Buyer’s due diligence – Receipt of necessary financing – Execution of definitive agreements – No material change in Seller’s business or results – Receipt of third party/governmental consents • Milestones/Benchmarks 14
Typical Provisions of a Letter of Intent (cont.) • Other Obligations – Buyer’s right to investigate and have access to business – Exclusive Dealing/“No-Shop” Clause (with a possible fiduciary out if a public target) • Break-up Fee? – Confidentiality obligations (unless separate confidentiality agreement was signed) – Ordinary course conduct of business 15
Provisions of a Letter of Intent • Contractual “boilerplate” – Choice of law – Venue selection – Merger clause – Responsibility for expenses – Termination provisions/survival provisions – Signature 16
Letters of Intent: The Buyer’s Perspective • Exclusivity – eliminate other bidders – No-shop provisions – Notice of other approaches • Expense Reimbursement/Break-Up Fee? • Access to Information – Books and Records – Material Contracts – Real Estate – Customers – Employees – Advisors (e.g., outside counsel for litigation assessment) • Operating Covenants 17
Letters of Intent: The Seller’s Perspective • Seller’s leverage may be highest at this point in a transaction • Preservation of Confidentiality (if not previously addressed) • No-Hire/Non-Solicitation of Employees – Subject Employees – Possible Exceptions • Limited Access to Information/Personnel • Reverse Diligence of Buyer • Other Specific Terms/Transaction Details 18
Letters of Intent: Legal Principles • Binding vs. Nonbinding – Letter of intent should be clear on whether or not parties intend document to be binding. – Parties’ intent is generally upheld if properly stated. – Often the parties want certain provisions to be binding and others to be nonbinding. 19
Binding vs. Nonbinding • If there is a manifest intention that formal agreement is not to be complete until reduced to formal writing, there is no binding contract. • Courts will look at language of letter of intent to determine if parties intended to be bound. • Courts frequently look to the conduct of the parties to determine if there was an intention to be bound. 20
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