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What are important legal issues to consider in a Letter of Intent?

Andrew Sherman
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Andrew Sherman is an M&A Partner at Jones Day. He focuses his practice on issues affecting business growth for companies at all stages, including developing strategies to leverage intellectual property and technology assets, as well as international corporate transactional and franchising matters.

He has served as a legal and strategic advisor to dozens of Fortune 500 companies and hundreds of emerging growth companies. He has represented U.S. and international clients from early stage, rapidly growing start-ups, to closely held franchisors and middle market companies, to multibillion dollar international conglomerates. He also counsels on issues such as franchising, licensing, joint ventures, strategic alliances, capital formation, distribution channels, technology development, and mergers and acquisitions.

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What are important legal issues to consider in a Letter of Intent?


Price and terms get locked down in an LOI, but they tend to get locked down on a "to be confirmed" by the due diligence phases. So if I’m on the buy side and I get some unexpected due diligence surprises, you better be sure that we’re going to be revisiting price and terms, and I’m going to have the legal right to negotiate price and terms. Where people get upset is if there are no due diligence surprises and the buyer decides to revisit price and terms anyway.

Positive due diligence surprises happen more rarely, but they might also affect price and terms. 90% of the time we’re thinking about negative surprises. Sometimes, there’s upside surprises and sometimes the surprises aren't so great. Imagine this phone call: I represent the seller. You’re the lawyer for the buyer. I call you and I say: "We’ve got a bit of a problem. You agreed to pay $100 million for the company but we just landed IBM as a client unexpectedly and it’s going to be a $20 million contract for the next three years. I think we need to do a purchase price adjustment because of the upside." Now, that usually is not as contentious because it’s good news but still, it’s going to get negotiated.

Other things in the LOI that are usually very important, one would be the no shop clause. What that means is once you sign up with us as a buyer, you’re going to stop shopping the deal. You’re not going to continue to talk to other buyers. So if we, the buyer, are going to put a lot of time and effort and due diligence in learning your company, we’re not going to do it while you’re basically dating a lot of other people. I need to know I have a commitment. The vendor says, "Okay, I’ll give you that commitment. How long will it be? Will it be 45 days, 60 days? How much are you going to pay me for that? If I’m not going to talk to any other buyers, shouldn’t you throw some consideration for that covenant? Okay, I’ll do it but what if people contact me and I don’t contact them, does that count?" So you can see that you can take something as simple as the no shop clause and break it down into sub issues around it.

Another piece is what’s binding in the agreement and what’s not. You always want the confidentiality clauses to be binding. You want to be protected that the buyer is not just going on a fishing expedition and trying to learn as much about your company as possible, particularly strategic buyers. If you’re selling only to private equity funds, that may be less of a concern, but if you’ve got a lot of strategic buyers in your industry, looking at your company, you’re going to want to make sure that you’ve got the strongest confidentiality covenants that you can. Same thing with non-solicitation covenants. They are going to be getting your org charts. They are going to be getting your employment records. They are going to be getting your compensation plan. They are going to get all that stuff. You don’t want them cherry picking your employees after the deal. So I would say those are the most important legal issues to consider in an LOI.

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