Business Contracts
Letter of Intent (LOI)
A preliminary document outlining the key terms and conditions of a proposed transaction before a definitive agreement is drafted.
Overview
A preliminary document outlining the key terms and conditions of a proposed transaction before a definitive agreement is drafted.
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Who Needs This Document?
Companies considering mergers or acquisitions, real estate buyers, investors, and parties entering complex business transactions.
When Do You Need This?
Used in the early stages of complex transactions such as mergers, acquisitions, real estate purchases, or significant business deals. Typically precedes due diligence and the drafting of a definitive agreement.
Key Provisions
A well-drafted document should include the following essential provisions:
- Summary of proposed transaction terms and structure
- Binding vs. non-binding provisions distinction
- Due diligence period and exclusivity (no-shop) clauses
- Conditions precedent and timeline for definitive agreement
Frequently Asked Questions
- Which parts of a letter of intent are usually binding?
- Most of an LOI's substantive deal terms are deliberately non-binding, giving either party room to walk away before a definitive agreement. Certain provisions are typically made binding regardless, including confidentiality, exclusivity, and which party pays costs if the deal collapses. Reading an LOI as fully binding, or fully non-binding, is the most common misunderstanding of what the document does.
- What does an exclusivity clause in an LOI actually restrict?
- An exclusivity, or no-shop, clause stops the receiving party from negotiating with other potential buyers or partners for a set period while due diligence and definitive agreements are worked out. It protects the party that just invested time and resources in the deal from being used as leverage against a competing offer. The period is usually weeks to a few months, not indefinite.
- Can a party walk away after signing a letter of intent?
- Generally yes, for the non-binding deal terms, since an LOI is designed to be a framework rather than a final commitment. Walking away doesn't come free, though: a party that breaches the binding provisions, like exclusivity or confidentiality, can still face liability for that specific breach even though the underlying deal never closed.
Related Documents
- Partnership AgreementDefines the terms, responsibilities, profit-sharing, and governance structure between business partners forming a general or limited partnership.
- Shareholder AgreementGoverns the relationship between shareholders of a corporation, protecting minority rights and establishing corporate governance rules.
- Non-Disclosure Agreement (NDA)A legally binding contract that establishes confidentiality between parties sharing sensitive information, trade secrets, or proprietary data.