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M&A Letters of IntentStrategies for Sellers and Buyers Crafting Preliminary Deal Terms and Conditions

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1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, DECEMBER 9, 2010

Today’s faculty features:

Mark D. Williamson, Principal, Gray Plant Mooty, Minneapolis

Igor Kirman, Partner, Wachtell Lipton Rosen & Katz, New York

B. Scott Burton, Partner, Sutherland Asbill & Brennan, Atlanta

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.

Letters of Intent:

22 Bench&Bar of Minnesota ▲ November 2007 www.mnbar.org

Letters of intent can facilitate the process of deal making but can also create unin-tended problems. Careful drafting, sensitivity to the interests of buyer and seller, andknowing how courts in the jurisdiction have determined when provisions are binding

or nonbinding will help counsel avoid the pitfalls.

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www.mnbar.org November 2007 ▲ Bench&Bar of Minnesota 23

In the early stages of many transac-tions, the parties often choose tomemorialize the basic terms of theiragreement by negotiating and enter-

ing into a letter of intent. In general, theletter of intent sets forth the purchaseprice and certain other key terms, all ofwhich form the basis for further negoti-ations between the parties. The letter ofintent is a preliminary document; it isintended to be superseded by a defini-tive agreement.

Nothing mandates a letter of intent,and parties can simply proceed to thedrafting of a definitive agreement withoutever signing a letter of intent.Nevertheless, buyers and sellers often pre-fer to formalize the principal terms of aproposed deal early in the process beforeengaging in lengthy and expensive nego-tiations of the definitive agreement.

Typically, a letter of intent containsboth binding and nonbinding provisions.It is possible, however, to make the entireletter of intent binding, either explicitlyor accidentally. Careful drafting is criticalto avoiding unintended results.

AdvantagesThe primary benefit of a letter of

intent is its potential to save time andmoney. It injects a degree of certainty intothe early bargaining process. If the partiescan agree on essential terms quickly, con-firming those terms in a letter of intentencourages the parties to expend theresources necessary to close the deal, andthe time and expense of due diligence andfinal negotiations become more palatable.Alternatively, attempting to draft andagree on a letter of intent may make itclear to both parties that they are simplytoo far apart to continue negotiations. Ineither case, both the prospective buyerand the prospective seller are better off forhaving assessed the terms of the proposeddeal before negotiations reach a moreadvanced stage.

If the deal moves forward, a letter ofintent serves as a useful road map for nego-tiating the definitive agreement. With thebasic terms in place, the remaining nego-tiations are more likely to be focused andstraightforward. Moreover, the parties typ-ically develop a psychological or moralcommitment to the terms of the transac-tion, particularly when the parties issuepress releases or otherwise make the pro-posed transaction known to the public,employees, shareholders or customers.Further, the letter of intent may set forththe parties’ expectations regarding whenthey will conduct due diligence and nego-tiations, so the process will benefit fromthe certainty of schedules and deadlines.

A letter of intent may also be advanta-geous to a buyer who needs to secure out-side financing. Absent a written commit-ment to the deal, prospective lenders maynot be willing to evaluate or commit tofinancing the transaction. In addition,the letter of intent evidences a commit-ment to the transaction that may helpattrct third-party investment dollars.

Finally, a letter of intent may speedregulatory approvals. Many larger transac-tions require filings under the Hart-Scott-Rodino Antitrust Improvements Act of1976 (“HSR Act”), which cannot bemade until after the buyer and seller haveentered into an agreement with respect tothe acquisition. A fully executed letter ofintent can serve as the basis for makingthe filing under the HSR Act.

For these and other reasons, executinga letter of intent is common practice inmany transactions.

DisadvantagesDespite the frequent use of letters of

intent, there are significant disadvan-tages and potential pitfalls associatedwith the practice. While none of theseshould absolutely discourage the use ofletters of intent, diligent practitionerswill want to evaluate carefully both the

upside and the downside before decidingthat a letter of intent is indispensable toany particular deal.

The greatest disadvantage of a letter ofintent is that, depending on the circum-stances, a court may later find that provi-sions the parties intended to be nonbind-ing are actually binding. As a result, theparties could be stuck with a deal that hasnot been thoroughly negotiated and fromwhich material terms are missing. Theremaining unnegotiated terms must beworked out between unhappy parties, orbe filled in at the court’s discretion.

While a letter of intent may ultimate-ly prove beneficial, the process of draftingand negotiating it has costs. Negotiatinga letter of intent frontloads the expensein anticipation of a smoother path to anultimate deal (or quicker insight that nodeal is to be had). As a result, such letterstend to make more sense in larger andmore complex transactions. Parties tosmaller or more straightforward dealsmay prefer to proceed directly to a defin-itive agreement absent other compellingreasons for a letter of intent.

In addition, parties should be wary ofthe potential effects of negotiating toomany details too early in the deal.Drafting a letter of intent may push theparties to consider fine points and diffi-cult issues better left until after thebroad outlines of the deal are estab-lished. The danger, of course, is thatnegotiations will bog down before theygain real momentum.

Moreover, parties who execute a letterof intent often negotiate ultimate termsin the definitive agreement that differ sig-nificantly from those in the letter ofintent. This may not pose a problem incircumstances where the parties proceedwith the understanding that the letter ofintent represents tentatively agreed-uponterms. However, if discord arises, it is pos-sible that the parties will point to compet-ing written agreements.

Their Use in Minnesota Business TransactionsBusiness Transactions

24 Bench&Bar of Minnesota ▲ November 2007 www.mnbar.org

Negotiating a Letter of IntentIn the merger or acquisition context,

the control of information often definesthe parties’ respective bargaining posi-tions. During the initial stages, the sellermay remain circumspect, revealing onlyenough information about its business tomaintain the buyer’s interest without ced-ing its bargaining edge. Thebuyer, on the other hand,wants as much informationabout the seller as soon aspossible. This bargainingfriction is at its maximumbefore the parties have com-mitted to a letter of intent,and in large part dictateswhat the negotiating partieswill want to include in thatpreliminary agreement.

The Seller’s Interests.Generally, the seller will be more motivat-ed than the buyer to make the letter ofintent as specific and explicit as possible.The seller’s leverage is likely to be greatestbefore it signs a letter of intent, becausethe buyer has not yet had the opportunityto gather detailed information about theseller, and because the seller may solicitand entertain, or purport to entertain,multiple suitors. Thus, the seller is morelikely to obtain favorable terms during thisperiod and will want to go as far as possi-ble toward formalizing and solidifying thematerial terms, such as deal structure,price, and form of consideration.

Beyond this overarching desire forspecificity in the letter of intent, the sell-er will want to secure the buyer’s promiseto keep in confidence certain informa-tion about the seller. Because any breachof confidentiality can be very damagingto the seller’s interests, including itsemployee morale and its various businessrelationships, the seller will want theconfidentiality provision within the let-ter of intent to be binding. If the confi-dentiality covenant is favorable to theseller, the buyer will be bound not to dis-close any information about the sellerthat the seller chooses to designate asconfidential. The provision should carveout any publicly known information andany uses of information that are necessaryfor obtaining consents or approvals nec-essary to close the deal.

Sellers may also want to considerobtaining a promise that the buyer will

not compete with the seller nor solicit theseller’s key employees, customers, or sup-pliers during negotiations and for a periodof time following the conclusion ofunsuccessful negotiations. Again, becausethe buyer will gain access to informationregarding the seller’s business relation-ships during the negotiations, the seller

will want to prevent the buyer from usingthis information to affect adversely itsbusiness operations.

The Buyer’s Interests. While theseller has a strong interest in preservingconfidentiality, the buyer has an equallystrong counter-interest in obtainingaccess to information from and about theseller. Even though the two interests sub-stantially compete with one another,they are not mutually exclusive. Thebuyer will simply want to be sure that oneof the provisions within the letter ofintent grants it free access to the targetcompany’s otherwise proprietary infor-mation for the full term of the negotia-tions. The buyer will also want unlimitedaccess to the seller’s personnel, contracts,books and other data. Since the buyerwill not gain this access until after theparties execute a letter of intent, thebuyer will want to keep the key terms ofthe deal as general as possible, putting offthe more problematic issues until it pos-sesses greater knowledge.

Further, the buyer will want, at theearliest possible stage, to eliminate othersuitors and elevate its own bargainingposition. To that end, the buyer will wantto include a “no-shop” commitment andother standstill provisions in the letter ofintent. A no-shop provision establishes aperiod of exclusive dealing and typicallyhas two components: a prohibitionagainst soliciting or negotiating offersfrom any third party, and a mandate tonotify the buyer if the seller receives any

offers or inquiries. A break-up fee mightalso be considered, which would requirethe seller to pay the buyer an agreed-uponamount in the event the seller completesthe business transaction with anotherbuyer within a specified time period.Break-up fees are heavily negotiated, andmost sellers will resist such a proposal.

The combination of ano-shop provision and theability of the buyer to havefull access to informationregarding the seller leadsmost commentators andpractitioners to concludethat letters of intent gener-ally are more favorable tothe buyer than to the seller.

Binding or Nonbinding?The question of

whether a letter of intent is binding is byfar the thorniest—and the most litigat-ed—issue associated with the topic of pre-liminary agreements. Professor AllanFarnsworth has flatly said that “[i]t wouldbe difficult to find a less predictable areaof contract law.”1

The difficulty may not be immediatelyapparent. Corbin, in his treatise on con-tract law, declared it well-settled that nocontract exists “where the parties considerthe details of a proposed agreement, per-haps settling them one by one, with theunderstanding during this process that theagreement is to be embodied in a formalwritten document and that neither party isbound until they execute this document.”2

The problem may arise, however,when trying to determine the parties’understanding during this process. Thatis, when negotiations go awry, the courtsmay be tasked with determining theintent of the parties after the fact—noeasy job if the parties’ words and actionscontain any ambiguity. To complicatematters further, courts of various juris-dictions take different approaches indetermining the intent of the parties.Minnesota courts, for example, take thestrict-interpretation approach and con-strue any ambiguity in the language ofthe letter of intent against the party try-ing to bind the other party. Other courtslook beyond the four corners of the let-ter of intent and consider other factors.Those courts may look at oral state-ments and other actions, and turn a let-

The question of whether a letter of intent is

binding is by far the thorniest—and the most

litigated—issue associated with the topic of

preliminary agreements.

www.mnbar.org November 2007 ▲ Bench&Bar of Minnesota 25

ter of intent that is nonbinding on itsface into a binding agreement.

Lessons from the Case Law. Courtstypically examine several factors inattempting to determine whether the par-ties intended to be bound:

a. the actual words of the docu-ment;b. the context of the negotiations;c. whether there has been partialperformance of the obligations ofeither party;d. whether any material issuesremain to be negotiated, orwhether the terms in the letter ofintent are sufficiently definite to beenforceable; ande. whether the subject matter ofthe discussions concerns complexbusiness matters that customarilyinvolve definitive written agree-ments.3

The first of these factors—the actuallanguage in the letter of intent—is themost important. Especially in Minnesota,the courts look primarily at the language ofthe letter of intent to determine the intentof the parties. Minnesota courts generallystart with the premise that a letter of intentconstitutes an agreement to agree and thusis not a binding contract.4 If the partiesclearly express that the letter of intent islegally binding, or explicitly identify whichportions of the letter of intent are legallybinding, such expressions control. If theparties do not manifest such an explicitexpression on paper, Minnesota courts areunlikely to enforce such an agreement.Further, a letter of intent that merely rep-resents a summary of the parties’ negotia-tions and shows nothing more than anintention to negotiate in the future isunenforceable in Minnesota.5 Such agree-ment does not constitute the parties’ com-plete and final agreement.6

To create a binding contract, the partiesshould use keywords, such as “legally bind-ing” and “enforceable,” in the letter ofintent. The parties may specify early on inthe document that the entire agreement is“legally binding and enforceable,” or indi-cate separately which parts of the agree-ment are binding. A mere label “letter ofintent” alone will not be determinative.7

The Minnesota Supreme Court declined toenforce a letter of intent containing the

language, “the parties shall enter into adefinitive purchase agreement … .”8

Similarly, the Minnesota Court of Appealsheld that the language, “the parties agree toproceed forward with a formal agreement”did not bind the parties.9 Interpreting theseMinnesota cases, the 8th Circuit also con-cluded that language that speaks of futureactions and agreements indicates the par-ties’ intent not to be bound.10

Conversely, to assure that a letter ofintent is not enforced, the lawyers draft-ing a nonbinding a letter of intent shouldclearly label the letter of intent as “non-binding.” Further, based on a MinnesotaCourt of Appeals decision, the draftershould include disclaimers, such as “[t]hisletter of intent shall not be a binding legalagreement,” and “neither party shall haveany liability to the other until the execu-tion of the definitive agreement.”11

A word of caution is in order, howev-er, when drafting a partially binding letterof intent. In one Minnesota case, theCourt of Appeals invalidated the entireagreement, although the agreement con-tained a binding covenant. The provisionstated that the parties “agreed to termi-nate negotiations with other prospectivepurchasers and work toward finalizing thedefinitive purchase agreement.”12 Thecourt pointed out that, despite the good-faith covenant, there were two over-whelming facts that indicated otherwise.The letter was titled “nonbinding offer”and the letter also contained a broadstatement to the effect that the entiredocument shall not be a binding legalagreement. Given the obvious title andthe applicability of the broad language tothe entire contract, the court decided toquash the covenant.13 Subsequently, the8th Circuit followed this precedent andconcluded that where the parties haveagreed that a letter of intent, in its entire-ty, is not binding, it will not enforce anindividual provision of the letter of intentas a freestanding “contract” promise.14

Therefore, to create a partially bindingletter of intent, a general statement

declaring the agreement as nonbindingshould be qualified with additional lan-guage, such as “except as specified.” Theensuing provisions should then be sepa-rately noted and labeled as “legally bind-ing and enforceable.”15 The combinationof the two should alert the reader and thecourt that the letter of intent, thoughgenerally not binding, contains provi-sions that are binding.

Finally, for a letter of intent to be bind-ing and enforceable in Minnesota, theparties must also include the essentialterms in the agreement.16 Without theessential terms, such an agreement doesnot provide a basis for determining theexistence of breach or giving an appropri-ate remedy.17 The mere inclusion of essen-tial terms alone, however, will not bindthe parties, unless the intent of the partiesto be bound is also explicit in the agree-ment. In Lindgren v. Clearwater Nat’lCorp., despite the inclusion of preciseterms—such as sale terms, the property’s

Mark Williamson is a principal at GrayPlant Mooty and cochair of the firm’s

Mergers & Acquisition practice team. Hepractices in the areas of general busi-ness, corporate and securities law andhas extensive experience representingpublic and private companies in corpo-

rate transactions including mergers,acquisitions and divestitures, public andprivate offerings, tender offers, and cor-

porate financings.

To create a binding contract,

the parties should use key-

words, such as “legally bind-

ing” and “enforceable,” in the

letter of intent.

26 Bench&Bar of Minnesota ▲ November 2007 www.mnbar.org

legal description, the purchase price, theterms of the mortgage and a closingdate—the Minnesota Supreme Courtnonetheless held that the agreement wasunenforceable as a contract. The Courtfound that a letter of intent was not bind-ing as a matter of law unless the partiesclearly manifested intent to be bound.

One should bear in mind, however,that depending on the jurisdiction courtsmay nonetheless find agreement to nego-tiate in the future binding. In other juris-dictions, if the parties include a covenantto negotiate in good faith, they may bebound by it notwithstanding the non-binding nature of the rest of the letter ofintent.18 Moreover, when the partiesthemselves have not been explicit as towhether or not its provisions are binding,the courts are split on the question ofwhether buyer and seller are bound by theletter of intent.19

Even language that apparently con-templates a definitive agreement to bereached in the future may not prevent aletter of intent from binding the parties.20

If courts find that the parties, by theiractions, demonstrated an intention to bebound, an ambiguously worded letter ofintent may be held binding. This is true

even when the letter of intent does notresolve all of the issues that require resolu-tion for the transaction to be completed.21

Drafting ConsiderationsBecause the actual language in the let-

ter of intent is crucial, it is vital for theparties to seek legal counsel in drafting itsprovisions. Some parties may resistinvolving lawyers at all because they feardriving up the cost of the transaction orbecause they do not want to overcompli-cate the process. Other parties prefer towork out the essential aspects of the dealand then invite their respective attorneysto review and comment on a draft of theletter of intent. In no case should the par-ties assume that simply captioning a writ-ten document with “agreement in princi-ple” or “letter of intent” will reliably bindor prevent it from becoming binding.Many ships have broken on the shoals ofsuch optimism.

Beyond making certain that attor-neys are a part of the negotiation of let-ters of intent, parties who want non-binding letters of intent should knowthat certain strategies will help toensure that courts will not reach a con-trary conclusion:

a. include an express and unequiv-ocal statement that the letter ofintent is not intended to be anenforceable agreement; b. clearly label all provisions thatare intended to be binding (e.g. aconfidentiality agreement or no-shop provision), and set them apartfrom nonbinding provisions;c. if appropriate to the circum-stances of the deal, refrain fromspecificity about essential terms;d. refer to conditions to be satisfiedin the future; ande. use the subjunctive tense (i.e.,would, not will).

Overall, the language of the letter ofintent should be definite and precise.

Given the numerous benefits associat-ed with negotiating and entering into aletter of intent and the fact that most par-ties prefer to have the basic business termsmemorialized early in the negotiations, itis unlikely that the practice of using let-ters of intent will change. Consequently,it is imperative that the parties and theirlegal counsel draft all provisions carefullyand purposefully in order to avoid unin-tended consequences. ▲

Notes1 E. Allan Farnsworth, “Precontractual Liability and Pre-

liminary Agreements: Fair Dealing and Failed Negotia-tions,” 87 Colum. L. Rev. 217, 259–60 (1987).

2 1-2 Arthur L. Corbin et al., Corbin on Contracts §2.9(2007 ed.).

3 To be enforceable, a letter of intent must contain theessential terms of the transaction—price, structure, andthe assets or properties involved. See Restatement (Sec-ond) of Contracts §27, cmt. c (1981); Winston v. Media-fare Ent. Corp., 777 F.2d 78 (2d Cir. 1985).

4 Hansen v. Phillips Beverage Co., 487 N.W.2d 925, 927(Minn. App. 1992).

5 Id.6 Mohrenweiser v. Blomer, 573 N.W.2d 704, 706 (Minn.

App. 1998).7 Metro Office Parks Co. v. Control Data Corp., 295 Minn.

348, 355 (Minn. 1973).8 Lindgren v. Clearwater Nat’l Corp., 517 N.W.2d 574

(Minn. 1994).9 Mohrenweiser, 573 N.W.2d at 707.10 Richie Co. v. Lyndon Ins. Group, Inc., 316 F.3d 758, 762

(8th Cir. 2003).11 See Hansen, 487 N.W.2d at 926. 12 Id. at 927.

13 Id.14 Richie, 316 F.3d at 761. 15 See Huber and Sons, Inc. v. Service Corp. Int., 2003 U.S.

Dist. LEXIS 4094, at *6 (D. Minn. 03/13/03). 16 J & W Enterprises v. TM Marketing, Inc., 1997 Minn.

App. LEXIS 678, at *3 (Minn. App. 06/24/97).17 Richie, 316 F.3d at 761.18 See Fickes v. SunExport, Inc., 762 F.Supp. 998 (D. Mass.

1991); see also A/S Apothekernes Laboratorium v. I.M.C.Chemical Group, Inc., 678 F.Supp. 193 (N.D. Ill. 1988);Feldman v. Allegheny Int’l, Inc., 850 F.2d 1217 (7th Cir.1988).

19 For a discussion of this split in courts nationwide, seeFarnsworth, supra note 11, at 288–90 and accompanyingnotes.

20 The leading case is Texaco, Inc. v. Pennzoil Co., 729S.W.2d 768 (Tex. App. 1987). See also Field v. GoldenTriangle Broadcasting, Inc., 305 A.2d 689, 693 (Pa.1973), cert. denied, 414 U.S. 1158 (1974); Restatement(Second) of Contracts §27 (1981).

21 The court may supply terms that are left unresolvedaccording to what is commercially reasonable, or it mayrequire the parties to negotiate those matters in goodfaith. See Itek Corp. v. Chicago Aerial Indus., Inc., 248A.2d 625 (Del. 1968).