Letters of Intent are written every day, but if the letter is not entered into with good faith, and the parties don’t open that dialogue with good faith they often are soon to fail. This legal overview by Roger truly tries to point out some of the obstacles and intent that needs to be put on the table to negotiate and enter into viable Letters of Intent in today’s legalized world.
LETTERS OF INTENT AND THE DUTY TO NEGOTIATE
IN GOOD FAITH
Roger Neu, J.D. , CPA, M&A Law Firm
It is common to put language in an LOI expressly stating that it is “nonbinding” and that the only obligations of a buyer and seller will arise out of a signed purchase agreement.
This newsletter will briefly address the “duty to negotiate in good faith” in the case of a “nonbinding” LOI. The “duty to negotiate in good faith” may sound pretty innocuous and appear not to be any real burden, but in real life (not academia, government or, often times, the courts) this is a duty that can cause great damage. By definition, this is a very subjective standard. This implied obligation can be used by disgruntled buyers or sellers as a hammer and a threat to terminate a deal or make the other party continue to negotiate or complete a deal, even though facts were not as represented or facts have changed.
In order to remove any doubt, the LOI should not only state that it is “nonbinding,” but should contain express language to the effect that:
- The LOI does not create any obligations on the part of any of the parties. [Note, however, that some paragraphs such as “Confidentiality” and “Nonsolicitation” will be binding];
- The definitive agreement shall be the only agreement that gives rise to binding obligations on the parties;
- The LOI does not obligate either party to enter into a final definitive agreement; and
- The LOI does not create any obligation on any party to engage in or continue negotiations for the purpose of entering into a definitive agreement.
The statements in 3 and 4 above may seem harsh, but are readily accepted by knowledgeable buyers and sellers. The alternative is to have some judge deciding if you negotiated long enough or hard enough. If the judge (probably with little or no business experience and with very little knowledge or understanding of your deal) decides you did not negotiate the right way you could be liable for all kinds of trumped up damages. You will start hearing about things like “implied covenants,” “promissory estoppel,” “interference with prospective economic advantage” and other similar maladies.
Parties to LOIs that are silent on whether the LOI is “binding” or with LOIs that state they are “binding” should buckle up for the ride. If the deal does not go smoothly, buyer and seller could be in for a long period of litigation.
Buyers and sellers should be protected with properly drafted LOIs. Please do not hesitate to contact me with any LOI questions or to address any other M&A matters.