M&A Monday: Chapter 3: The Bindingness of an LOI
This is the first of several posts doing a deep dive into the LOI: Binding vs. Non-Binding (plus a dive into Exclusivity)
LOIs are the foundation of your deal, but not all LOIs are created equal. I have seen some destroy deals and others create a seamless roadmap to closing. The LOI is a (mostly) non-binding letter outlining the high-level terms of the deal. It sets expectations on the most important issues. LOIs should not be too specific prior to diligence, but cannot be too ambiguous. Sometimes LOIs are accepted immediately and sometimes negotiated for months. Buyers almost always submit the LOI to sellers.
I have drafted and reviewed hundreds of LOIs. In the next few M&A Monday chapters, I will do a deep dive into LOIs, their critical terms, and where buyers go wrong.
Today: the bindingness of an LOI (and discussion of Exclusivity).
Two weeks ago, a seller called me. They were under signed LOI, but the seller was starting to feel they could get a better offer. They had an exclusivity provision restricting them from negotiating other offers. As we reviewed the LOI together, we saw it had explicit language that said, this LOI is non-binding and not intended to evidence a binding agreement (with no exceptions). Even though the LOI restricted negotiations, it was non-binding.
Similarly, I had a buyer send me an LOI after it was signed. He wanted to change the purchase price and seller was refusing. The LOI had no “non-binding” or “no commitment”. I told him the terms of his LOI were likely binding, and legally enforceable. At least he was required to negotiate in good faith.
The LOI should state very clearly that the provisions are non-binding, except for the binding provisions. Numerous court cases have confirmed that without specifying, the LOI could be binding.
Often people do not understand that you do not need a formal contract for a binding agreement. Even terms scribbled on a napkin at a restaurant can be binding.
I tell buyers all the time, that while certain terms are non-binding, and certain are binding, all terms are reputationally binding. As a buyer, the terms of the LOI should not change, unless there is a material reason for the change (e.g., QoE results). You do not want the reputation of someone who locks up a deal intending to retrade.
Which provisions should be binding? A buyer’s LOI should clearly state the following provisions are binding and that they survive termination of the agreement (otherwise a seller can just terminate the agreement):
1. Exclusivity. This provision requires that seller not engage with or negotiate other offers for a certain period of time. Usually, this is about 60 days. Remember that in a Sign Then Close (explainer here: https://x.com/Eli_Albrecht/status/1757040147013542215?s=20), your LOI exclusivity will be replaced by your purchase agreement exclusivity. For a buyer, once the LOI is signed they will start spending significant time and money.
A buyer who does not have exclusivity is like a person engaged to a partner who is still going on other dates. It creates a terrible dynamic and your deal is unlikely to close. I posted about the dangers of this here: https://x.com/Eli_Albrecht/status/1693610584653091174?s=20).
Further, if a seller (or their broker) receives an unsolicited offer, the buyer should be able to see that offer and the terms of that offer. Sometimes, sellers ask for their broker to be able to accept other offers, but not show the seller. I don’t like this.
Exclusivity should have teeth. My LOIs include a provision that if seller breaches the exclusivity provision they have to pay buyer’s deal costs. Sometimes sellers do not like this provision, to which I answer, if you do not breach exclusivity, you have nothing to worry about.
Here is the language I use in the Expenses section: “provided, however, that Seller shall pay all costs and expenses (including reasonable attorney’s and other fees related to the recovery thereof) incurred by Buyer in connection with the Transaction, if Seller or any of its respective representatives breaches the terms of Section 9 of this Agreement.”
Finally, make sure it autorenews, unless terminated. Deals always go on longer than intended. If no one wants to terminate, the exclusivity should continue.
Here is my Exclusivity language:
2. Confidentiality. This extends the NDA confidentiality throughout the LOI period and makes it mutual.
3. Public Announcements. This restricts the parties from making press releases and announcements.
4. Expenses. This specifies that all expenses are paid by each party, except in the event seller breaches Exclusivity.
5. No Commitment. This provision says that the LOI is specifically non-binding, except for the binding provisions and no party makes any commitment to do anything.
6. Termination. This allows for the LOI to be terminated, however, you must be careful that in the event of termination, certain binding provisions survive (e.g., Exclusivity, Confidentiality, Governing Law, Confidentiality, etc.).
7. Entire Agreement, Counterparts, Governing Law, Waiver of Jury Trial. There are various other provisions that should also be binding.
I have seen a lot of LOIs and some of the forms that people are using are downright bad and will get you into trouble. My personal bias is that the cost of engaging an M&A lawyer at the LOI stage is well worth it. However, if you go at it on your own, please make sure you are careful about the bindingness of the LOI.
Next Monday, we will dive into the other terms of the LOI.
