A Letter Of Intent L.O.I. or LOI is different from a term sheet because whether binding or not, it expresses consent to certain terms, whether preliminary or not, and its structure is formatted as a letter.
Common in sophisticated commercial or financial transactions, a LOI outlines the terms of a deal a party proposes to the other, in which case it can be treated legally as an offer, or between two parties in which case it can be considered legally as an agreement, preliminary or not, depending on its terms.
The main purpose of a letter of intent is that it formalizes a preliminary agreement on a serie of points before or during negotiations occur.
Binding or Non Binding, that is The Question
A LOI can include provisions that are both binding and non binding. There are different ways in which a LOI can be binding. Some of the least binding LOIs essentially contain a contractual clause to treat the LOI as non binding.
The LOI can specifically spell out elements of an agreement (for example, a date for deal to be finished, who will write the contract, specifics on financing); these usually include a condition requiring these points to be approved by a board. One of the most binding types of letters of intent, also known as “failed letters of intent,” betray the entire concept of a letter of intent and serve as a contract in their entirety. A letter of intent should bring parties together and help lay out terms as a way to reduce the risk of litigation.
Letters Of Intent often include confidentiality or non solicitation clauses.
Other ways in which an LOI can protect both parties negotiating a deal include provisions stating that the deal can only go through if financing has been acquired by one or both parties, or that a deal has to be made by a certain date.
Common Uses of LOIs
Common uses of LOIs include:
- as a way to clarify which key points of a deal need to be negotiated
- as a method of announcing that two parties are negotiating (say, a joint venture between companies or a merger)
- to protect all parties involved in a deal
In the context of a business deal, the letter of intent is created by the management and legal counsel of a corporation, among others, and outlines the details of the action. For example, letters of intent are used during the merger and acquisitions process to outline a firm’s plan to acquire another company and will commonly disclose the specific terms of the transaction (i.e. whether it is a cash or stock deal).
Letters of intent are also used by those looking for government grants. Letters of intent can help the staff at an agency get an estimate of how much work may be required by a particular project or enterprise.
Negotiations Roadmap L.O.I.
The Negotiation Roadmap L.O.I. outlines what can and can’t be talked about outside of that negotiation, and it provides a roadmap that describes how things will proceed.
Letters of Intent are up for negotiation, as are the contracts themselves. One party may present an LOI, then the other party can counter with edits or a different LOI entirely. Ideally, the end product will protect both parties in their subsequent negotiation and fulfillment of the contract that the LOI posits they will attempt to agree on.
Some more binding LOIs can include the rules of negotiation of a contract as a binding agreement.