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Letter of Intent and Term Sheet in M&A transactions

Letter of Intent and Term Sheet in M&A transactionsThe takeover of companies or mergers with other companies is becoming more and more important. Be it to eliminate a competitor, to expand the business field or to efficiently bundle business potential – motives for merging companies are countless.

What is the letter of intent (LOI)?

A LOI usually contains legally non-binding as well as legally binding regulations regarding the intended transaction.

At the beginning of the negotiations of complex transactions, such as company acquisitions, joint ventures and private equity financing, the parties usually conclude a Letter of Intent (LOI).

The Letter of Intent is referred to as a “letter” because it is formulated as a letter from one party to the other. Nevertheless, it is usually negotiated between the parties.

What is a term sheet?

The term sheet is very similar. It is also often referred to as Heads of Agreement or Memorandum of Understanding (MoU). However, the term sheet is not designed like a letter, but rather like a contract, whereby the agreed regulations are often only briefly described.

Non-binding provisions in the LOI and term sheet

The non-binding regulations include the indication of the key points. In the case of a company acquisition these include, for example

  • object of purchase,
  • purchase price (often determined only as a price range or by the purchase price formula to be applied),
  • the scope of the seller’s warranties and
  • intended subcontracts, such as service and supply contracts between the parties.

The non-binding regulations also include those concerning the further steps to be taken until final contracts are concluded and the time schedule envisaged for this purpose, e.g.

  • the provision of information (in what form and by when),
  • conducting a due diligence of the company to be purchased when buying a company
  • the draft (competence and by when) and negotiation of the necessary contracts,
  • the target date for the conclusion of the final contracts and any conditions for their execution, such as required approvals from authorities or internal bodies or prior restructuring of the target company in the case of a purchase of the company

Binding regulations in LOI and term sheet

Legally binding regulations include those concerning the confidentiality of the negotiations and the information exchanged, and often the exclusivity of the negotiations, the bearing of costs, the choice of law and the competent court in the event of a dispute.

LOI/term sheet for early assessment of the transaction

The conclusion of the LOI/term sheet does not oblige the parties to continue the negotiation process until the end or to conclude the final contracts. However, under German law, it does establish a pre-contractual legal relationship that obliges the parties to be considerate.

A LOI/term sheet is intended to enable the parties to agree on the key points of the transaction at an early stage of the negotiations, so that they can move forward together.

In this way, it can be seen at an early stage whether a compromise is possible on controversial key points or whether it is better to break off negotiations that do not promise much success before considerable effort is expended, e.g. for a due diligence review or the drafting and negotiation of the necessary contracts.

Exclusivity of the negotiations

Last but not least, the conclusion of the LOI gives the parties the opportunity to agree on exclusivity, e.g. obliging the seller of the company not to enter into negotiations with any other party on the purchase of the company for a certain period of time.

WINHELLER advises on M&A transactions

The conclusion of a LOI/term sheet is therefore recommended for all types of transactions that require more effort.

Even though the regulations on the key points of the intended transaction are not legally binding, they do in fact determine the terms of the final contracts at an early stage. Any deviation from these regulations is often difficult to achieve in later negotiations. It is therefore advisable to consult a lawyer at an early stage when drafting and negotiating the LOI/term sheet. We will be pleased to assist you in the drafting and negotiation of a LOI or term sheet.

Continue reading:
Performing corporate acquisitions (M&A) – advice and review crucial in advance
German government blocks company acquisition by foreign investors for the first time

Phillipp von Raven

Attorney Phillipp von Raven specializes in the fields of corporate law and M&A/corporate acquisition as well as international business law and general cross-border commercial law.

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