TRENDS,

CONSIDERATIONS AND

BEST PRACTICESFebruary 4,

LETTERS OF INTENT

2015

Partner at Horwood Marcus & Berk

Chartered

• 2015 Illinois SuperLawyers Rising Stars

List

• Co-Chair of the M&A Subcommittee at the

Chicago Bar Association

• Chief Legal Officer, Open Heart Magic

• B.A/J.D. University of Wisconsin-Madison

awerner@hmblaw.com

(312) 606-3211

1. Overview of Letters of Intent

2. Advantages and Disadvantages

3. LOI Provisions: Binding versus Non-binding

4. General Trends

5. Attorney’s Role

1. Indicates intention to proceed to more serious discussions

2. Contains the key deal terms and conditions

3. Typically non-binding (although most will contain binding provisions)

4. Common in a wide variety of contexts

5. May also be called a “Memorandum of Understanding” or “Term Sheet”

6. Allows parties to “get engaged before getting married”

& ADVANTAGES

DISADVANTAGES

OF USING

LETTERSOF INTENT

1. Helps identify deal breakers at an early stage, including structure

2. Provides a map and timeline for the transaction

3. May reduce time and cost of completing definitive transaction documents

4. $ and time expenditure signals commitment

5. Binding terms can wrap up exclusivity to get a deal done

6. Informal nature allows parties to draft with minimal assistance of legal counsel

7. Provides safeguards in the event a deal collapses during later negotiations

8. Provides mental buy-in/moral commitment from both parties

1. Resources required - time and $

2. May result in unexpected outcomes (e.g., inadvertent creation of

binding commitments, inadvertent creation of duty to negotiate in

good faith, etc.)

3. Can lead to loss of leverage

NON-BINDINGPROVISIONS

1. Structure of Transaction

2. Price

3. Employee Issues / Retention

4. Expectations on Inventory/Debt/Working Capital

5. Indemnification

6. Conditions Precedent to Closing

Example:

◦ “Except for disclosure to the parties’ respective legal and professional

advisors, commercial lenders and other financing sources, and as

otherwise required by law, the parties will hold all information regarding

this letter of intent, the transactions contemplated hereby and the terms

hereof in strict confidence and will not disclose any such information to

third parties without the prior written consent of the other party hereto.”

Example:

◦ “Company X acknowledges that Company Y has and will continue to expend extensive time, effort, and costs to conduct its due diligence investigation and to negotiate definitive agreements in connection with the transaction contemplated by this letter of intent. Accordingly, for [120] days after the acceptance of this letter of intent, Company X (i) will negotiate exclusively with Company Y for the purpose of entering into a definitive written agreement and ancillary agreements contemplated by this letter of intent with Company Y and (ii) will not solicit, negotiate with or provide any information to any persons or entities other than Company Y who are or may be interested in acquiring Company X’s business or any of the assets or ownership interests of Company X. Company X shall notify Company Y promptly if any such proposal or offer, or any inquiry or other contact with any person with respect thereto, is made and shall, in any such notice to Company Y, indicate in reasonable detail the identity of the person or entity making such proposal, offer, inquiry or other contact and the terms and conditions of such proposal, offer, inquiry or other contact. Company X shall, and shall cause it’s respective owners, affiliates, officers, directors, representatives, employees and agents to, immediately cease and cause to be terminated all existing discussions, conversations, negotiations and other communications with any persons or entities conducted heretofore with respect to any of the foregoing.”

Example:

o “Each party will pay, and hold the other party harmless from, all of its respective

expenses incurred in connection with the transaction; provided that, this provision

shall not limit any party’s right to include expenses in any claim for damages

against the other party who breaches any legally binding provision of this letter of

intent.”

Example:

◦ “Company X and Company Y will not make any public statement,

press release, announcement or disclosure concerning the terms

or existence of this letter of intent, the proposed transaction or the

discussions relating thereto, except as may be required by

applicable law or as otherwise may be agreed upon by Company

X and Company Y; provided, however, that any party so required

to disclose any such information must use commercially

reasonable efforts to consult with the other party prior to making

any such disclosure.”

Example:

o “This letter of intent [and the definitive agreements] shall be

governed by and construed under the laws of the state of

Delaware without regard to principles of conflict of laws.

Company X and Company Y irrevocably consent to the

jurisdiction and venue of the state and federal courts located in

Delaware in connection with any action relating to this letter of

intent [and the definitive agreements].”

1. HMB experience in 2014

Trend towards more information/terms included

Clients being more receptive to engaging attorney earlier in the

process

2. Others?

1. Advise client on the utility and issues relating to Letter of Intent

2. Ask the following questions:

How would an LOI benefit the client in this particular transaction?

What will an LOI prevent the client from doing?

Is there an alternative way to achieve our goals (i.e. non-binding 1 page term sheet with just business terms)?

What is the overall legal budget for the transaction? Will an LOI eat up that budget or possibly reduce the overall budget?

SIGA Technologies, Inc. v. PharmAthene, Inc.

◦ An express provision requiring the parties to “negotiate in good faith” was contained in definitive agreements between the parties that were separate from the term sheet.

◦ Delaware Supreme Court ruled that under Delaware law, an express provision to negotiate an agreement in good faith based on a term sheet marked “Non-Binding” is binding.

◦ Delaware Supreme Court ruled that expectation damages could be awarded if the plaintiff could show both a violation of good faith and reasonably certain consequences of defendant’s bad faith action.

◦ Key Takeaways:

Don’t underestimate the binding nature of an agreement to negotiate in good faith. Once such an agreement has been made, a party will be subject to a duty to follow-through with the deal negotiations in good faith, irrespective of whether a term sheet is marked “Non-Binding.”

Consider (i) including provisions that qualify the obligation to negotiate in good faith so that the terms included in the term sheet are non-binding and open to further negotiation, and (ii) limiting the remedies available for breaches of the covenant to negotiate in good faith, such as providing exclusively for liquidated damages.

1. At the LOI stage, the Seller’s position will likely never be better, so it

can be advantageous for a Seller to spend the time/$ on an LOI to

lock in expectations.

2. While an LOI is generally beneficial to both parties, in some cases it

is not necessary or may be counterproductive:

With a weakened seller, it may make sense as a buyer to skip the

LOI and move quickly move to documenting the deal.

With parties of equal strength, a highly negotiated LOI may save

time/$ on documenting the final deal due to the specificity

contained in the final LOI.

1. Binding versus non-binding language – use language consistently:

Non-binding: words that clearly indicate non-binding intent: “would,”

“possible,” “proposed”

Binding: words that show definite obligations: “shall/will,” “must,” “covenant,”

“agree”

2. Specify and limit any potential remedy for breach.

3. Use clear disclaimers at the beginning and end of the LOI:

“No past or future action, course of conduct or failure to act relating to a

possible transaction, or relating to the negotiation of the terms of any

possible transaction or definitive agreement, will give rise to or serve as the

basis for any obligation on the part of any party.”

“[Except for Sections __, __ and __,] this document is nonbinding in every

respect and is for discussion purposes only.”

Contact: Aaron Werner at awerner@hmblaw.com

www.hmblaw.com