Mergers

and Acquisitions Letters of Intent (LOI) and Memorandum of

Understanding (MOU)

Note: This information is only for educational purposes

and should not be used for any other purpose. In no
event should the information contained in this document
be relied upon as giving legal advice. Always consult
your legal advisers/counsel before drafting any
contractual legal documentation.

The core of any successful business transaction is the Letter of Intent (LOI) or
Memorandum of Understanding (MOU). This enables both sides to indicated
that they are seriously interested in doing a deal and wish to explore further
discussions.

The LOI sets out the principle terms of the proposed deal to ensure that there is
genuine "meeting of minds" on the key issues.

This is the foundation on which the deal is constructed and with which
relationships of trust are built that lead to successful transactions.

Long or Short?

There are two approaches to an LOI

A Short LOI which simply covers the main points of the deal which provides the
negotiations with direction and momentum.

Introduction
Transaction Overview and Structure
Illustrative Time Table
Due Diligence Process
Exclusivity and Confidentiality
Non Binding Commitment


A Longer LOI which covers all the major points and issues and which can be used
to form the basis for drafting the sale and purchase agreement.

There are four aspects to a deal: Operational, Personnel, Financial and Legal. The
LOI is intended to set the criteria for these in the deal that is being discussed.


Binding or Non Binding?

Offer Subject to Contract and Due Diligence

A LOI can be binding or non binding. If it is non binding this must be clearly
stated: "Non Binding: Subject to Contract" or some similar wording. If nothing is
said, the assumption will be that the LOI is binding.

Binding Obligations
In most LOIs there are very few binding obligations with two key exceptions:

Confidentiality - both parties will keep confidential the fact that there are
negotiations on going and that a deal is being discussed. Appropriate
confidentiality agreements should be put in place prior to the release of
significant amounts of confidential information earlier in the transaction.

Exclusivity - This is sometimes called a No Shop Agreement. This means that
while the discussions are on going, the seller will not enter into any other
discussions with another party or use the negotiations as a bargaining tool to get
a better deal from someone else.

You may wish to include that the seller must continue to operate the company in
the ordinary course of business.

It is often a good idea to include a statement to the effect that the binding
provisions constitute the entire agreement between the parties, superseding all
prior oral or written agreements and that the LOI may be modified only in
writing signed by both parties.


Benefits of a LOI

• It sets the ground rules for the subsequent negotiations
• It provides a framework for negotiating and drafting a final agreement
• It can save time and money
• It can be used as a negotiating tool by either side
• It can be used to support an application for financing from a third party -
with appropriate disclosure to the seller
• It can serve to develop trust between the parties to the agreement
• It may provide the basis for the Buyer to commence their due diligence -
which normally has costs associated with it
• It can be used to lock the seller in to a period of exclusivity

The main advantage for a buyer is that they can gain exclusivity and have
reasonable confidence that a deal can be reached on acceptable terms before
investing further time and money, particularly in due diligence advisers.

For the seller, exclusivity is a disadvantage. However, they also benefit from
clarity on the terms of a potential deal. It also enables them to get a price in
writing which makes it harder for the buyer to change the price subsequently. It
also creates time pressure on the buyer who needs to finalise due diligence and
the deal documentation before the expiry of the exclusivity period,

The Potential Downside of LOIs

• They can be a waste of time and money
• They may trigger notification obligations to customers, creditors,
suppliers, government entities etc
• They may be binding even if the intent is non-binding
• You must be clear in your transaction why you want to enter into an LOI.
If there is not a good reason, its probably better not to - an unsigned Term
Sheet may be just as effective.
•
Key Components of LOIs

I am going to cover some of the key aspects of LOIs but in no event should the
information contained in this course be relied upon as giving legal advice and it
should only be used in conjunction with the advice of a competent corporate/tax
attorney/solicitor.

Parties to the Transaction

This section sets out the two corporate sides of the transaction Who is buying
whom and on what terms; Structure: Purpose, Scope, Background and Objectives

It is important to be clear here about the precise corporate entities involved in
the transaction, even perhaps to listing company numbers or places of
incorporation. In the event that there is a dispute in the future, it is essential that
these details are recorded.

The terms and conditions of the transaction are set out in brief or in detail.

Purchase Price and Terms

A. Total Purchase Price and currency
B. Payment Terms
⁃ Downpayment
⁃ Promissory Note Terms (interest rate, default etc.)
⁃ Performance Payments /Earnout
⁃ Royalty Fees
⁃ Purchase Price Adjustment assumptions and adjustment events
⁃ Liabilities to be assumed
B. Allocation of Purchase Price

Valuation Basis - May be included to set out the main assumptions underlying
the valuation of the business being bought. If these subsequently change as a
result of Due Diligence, this opens the door to a renegotiation of the price.

Key Assumptions underlying the valuation which may include:
• Forecast EBITDA
• Any add backs to EBITDA for one offs or vendors drawings
• Due Diligence supporting the achievability of the company's forecasts
• Company acquired on a debt and cash free basis
• • Company has sufficient net assets at completion to support
it normal working capital and operating requirements
• No material contracts or other such arrangements terminate or alter
adversely as a result in the change in ownership

Employment Agreements

The LOI should set out the buyers intentions to honour the existing employment
agreements of the selling company's management and staff. Where senior or
specific people are not expected to continue in employment with the company
this should be made clear.
Often, owner managers exit the company on a sale and this should be made clear.
It is important that this is handled correctly to prevent any subsequent disputes
arising from employment terminations.

Future roles for Management Team

It is customary to reflect the future roles for the existing management team in
the Letter of Intent. The Buyer will for the most part wish to secure the services
and the loyalty of senior staff and the first step to doing this is to explicitly set
out their future roles in this paragraph


Acquisition Agreement

The LOI may set out the principle objectives of the Sale and Purchase Agreement
along with any restrictions or limitations to the rights, assets or liabilities of the
company being sold. The letter should make it clear that the offer is subject to
the agreement and signing of a definitive sale and purchase agreement.

Other Deal Specific Points

Source of Funds - it may be helpful for the buyer to make clear that they
have the funds required for the deal and where they are coming from.

The document should make clear at some point that the deal is conditional on
Warranties and Indemnities appropriate to the transaction are available from
relevant parties

Due Diligence Review

The LOI should set out the scope for the Due Diligence Review process. This can
be general or provide specific information, such as some of the examples cited
below.

Financial
• Analysis of year to date performance
• Current run rate of the business
• Projected outcome for current full year
• Sales analysis and profitability by customer
• Analysis of the existing pipeline
• Assessment of key assumptions for next year forecast
• Anticipated market growth and company's position in the market
• Potential for expansion into new product areas and international markets
• Investigate current key customer relationships and interviews with key
customer contacts
Commercial
Legal
Environmental


Timetable and Closing

A time table can be set out explaining the key activities to be undertaken
between the signing of the LOI and the completion of the transaction. In the
event that the seller fails to meet the expectations of the buyer for access to
documentation, information or personnel, this clause can be cross referred back
to as reason for amending the time table.

Initial Two Week Period for initial due diligence after which offer will be
confirmed
Eight Week Period of Exclusivity comprising formal due diligence
Drafting of Legal Documentation, including Sale and Purchase Agreement

Achievability of the Timetable
Dependent on timely receipt of information
Time table may be attached at Appendix - key deliverables and milestones
Target Completion Date:

Exclusivity - Typically Binding
The Buyer will seek exclusivity from the Seller to prevent them discussing a deal
with anyone else. This will have an end date on it and can be typically between
six and eight weeks, although longer periods may be agreed. It is in the seller's
interest to keep this period as short as possible while the buyer will be seeking a
longer period of exclusivity.

Confidentiality - Typically Binding
Both sides are expected to agree that they will keep knowledge of the deal to
themselves and normally to a limited number of people within the two
organisations, but including their respective professional advisers. This is
particularly important in public transactions.

Publicity - Typically Binding
This clause addresses public disclosure of the transaction and agreement that
parties outside of either company, customers or lenders for example, will not be
informed of the discussions.

Rights of Cancellation or Termination - Typically Binding

If a LOI is binding, you may wish to include a paragraph which explains the terms
and or circumstances when the agreement may be cancelled. In the event of a
termination event, there may be a provision for a break up fee. However, this
may not be the only remedy in the event of a breach by the seller.

Costs and Expenses

It is normal for each side to bear their own costs and expenses.

Break Up Fees

In certain circumstances, the parties may agree that the seller will pay the buyer
a break up fee if the deal does not close (under certain circumstances) or if the
seller terminates the process. This is to keep the seller serious about the
negotiations and the buyer is seeking to protect themselves from having to lay
out substantial deal costs, most of which are not contingent on the deal closing.


Binding/Non Binding Provisions Clause

In a non-binding LOI, there will still be some clauses which are binding on both
parties and this paragraph makes it clear which these are.

No Intent to Create Legal Relations

This is a belt and braces clause inserted to reinforce the non binding nature of
the letter. This make take a form as follows:

With the exception of the paragraphs on confidentiality and applicable law
above, this letter does not and shall not in any circumstances constitute to form
the basis of a contract between the parties, who do not intend to create any legal
relations between them by signing this letter.


Designation of Negotiators

This can set out the principals involved in the negotiations along with their
contact details. The intention is to ensure that all information relating to the
discussions is made available to the people detailed in this section. In the event
that any individuals are replaced, written notice is normally set out as the means
to effect this.

Applicable Law

Offer is non binding and construed in accordance with English Law - or where
ever the deal is taking place. This specifies the jurisdiction and venue for any
future disputes relating to the LOI.