What Is a Letter Of Intent?
A letter of intent (LOI) is often the first step when one is looking to buy or sell a business. An LOI is prepared in writing by one party who wants to show the other party their interest to enter into a legally binding agreement for a major business transaction. In other words, LOIs are “agreements to agree.” In this article, we discuss the concept of an LOI and the subsequent steps following the delivery of an LOI.
- How Important Is A Letter of Intent?
- Is A Letter Of Intent Legally Binding?
- How Long Is A Letter Of Intent Valid For?
- What Happens Next?
- Hummingbird Lawyers LLP Can Help
How Important Is A Letter of Intent?
For private mergers and acquisitions (M&A) transactions, such as the purchase of assets of a business, an LOI is used to set out the preliminary terms and conditions of an agreement between the buyer and seller. As an LOI can often be legally binding between parties, it is important for each party to consult with their respective corporate-commercial lawyers to ensure each party fully understands all terms of the LOI before signing it.
Once the LOI is signed, it will serve as a guideline for the eventual M&A transaction. For example, the LOI can state the due dates for the parties to: complete their due diligence requirements; draft and execute the Agreement of Purchase and Sale (APS); and finalize their closing agenda. In this regard, the LOI can effectively set out the expectations for each party involved in the transaction, including their respective legal and financial advisors.
In addition to those reasons, LOIs can also serve to give each party certainty. Buyers will have the assurance that the seller isn’t shopping around for prospective buyers; and sellers themselves will have the assurance that the buyer is making a serious offer.
Is A Letter of Intent Legally Binding?
While not all LOIs are legally binding, there are aspects of an LOI that can be deemed legally binding. Even without a clause stating an LOI is to be “legally binding upon the parties,” the LOI may nevertheless legally bind the parties involved. According to Ontario courts, whether or not an LOI is legally binding or not will depend on the language of the LOI itself, and the actions of the parties involved. Given this uncertainty, it is highly recommended that you have a corporate-commercial lawyer draft or review your LOI before you sign it, and especially before you present it to the other party if you’re the one preparing it. This will ensure your protection down the road, and may help you avoid unnecessary litigation in the future.
How Long Is a Letter of Intent Valid For?
Typically, LOIs would indicate how long the offer under the LOI is open for acceptance. The offer can be open for 72 hours, two weeks, or be conditional upon the occurrence of certain events. It depends on the intention of the party presenting the LOI. The party receiving the LOI will have to respond within the allotted time period in order for the parties to proceed to the next step.
What Happens Next?
The next step would be for the parties to agree on a timeline and scope for their due diligence. Provided the parties are satisfied with their due diligence, one party will prepare and present an APS within the time period specified in the LOI. From there, the parties would enter into negotiations to ensure that both parties are satisfied with the terms and conditions in the APS. If you have made it to this point in the process without legal counsel, it would be strongly recommended that you seek the guidance, assistance and advice from a corporate-commercial lawyer. These agreements can be very complex in nature. It is crucial that you understand all the terms, conditions and obligations in the agreement you’re planning to enter into.
Hummingbird Lawyers LLP Can Help
With a strong understanding of business law, our Business Lawyers at Hummingbird Lawyers LLP are here to help. Hummingbird Lawyers LLP has two offices for your convenience. Providing qualified, skilled and experienced lawyers in Toronto and lawyers in Vaughan, we are committed to giving our clients the convenience, expertise and guidance they need. If you’ve received an LOI, or are considering delivering one, and you’d like to understand your rights and obligations under the LOI, contact us today to see how we can help.
