From the Model Stock Purchase Agreement, Second Edition. The Prefaces, Preliminary Notes, Appendices, and Commentary to the
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Model Stock Purchase Agreement, Second Edition
ANCILLARY DOCUMENT B
Letter of Intent
A letter of intent is often entered into between a buyer and a seller following the
successful completion of the first phase of negotiations of an acquisition transaction. The
letter generally, but not always, describes the purchase price (or a formula for
determining the purchase price) and certain other key economic and procedural terms
that form the basis for further negotiations. In most cases, the buyer and the seller do not
yet intend to be legally bound to consummate the transaction and expect that the letter of
intent will be superseded by a definitive written acquisition agreement. Alternatively,
buyers and sellers may prefer a memorandum of understanding or a term sheet to reflect
Although the seller and the buyer will generally desire the substantive deal terms
outlined in a letter of intent to be nonbinding expressions of their then current
understanding of the shape of the prospective transaction, letters of intent frequently
contain some provisions that the parties intend to be binding. As discussed more fully
below, the binding provisions of a letter of intent generally relate to the process of
conducting the negotiations and procee ding towards a definitive agree ment.
A client should have the benefit of its lawyer’s advice before entering into a letter
of intent. What portions of the letter of intent should be binding or nonbinding and the
risks of entering into a letter of intent at all are important issues with a heavy legal
overlay. The level of detail in the letter of intent and which issues should be addressed or
deferred are key strategic questions that should be discussed with the client, and their
likely impact on the negotiation of the acqui sition should be fully explored.
There are several reasons why letters of intent are used. A buyer and a seller
frequently prefer a letter of intent to test the waters before incurring the costs of
negotiating a definitive agreement and performing due diligence. The parties may also
feel morally, if not legally, obligated to key terms once they are set down in writing.
Sometimes the deal terms are sufficiently complicated that it is helpful to put them down
in writing to ensure that the buyer and seller have consistent expectations.
Signing a letter of intent at an earlier stage of the acquisition process, rather than
waiting for the definitive agreement, can facilitate compliance with regulatory
requirements. For example, a premerger notification form can be filed under the HSR Act
upon entering into a letter of intent, thereby starting the clock on the applicable waiting
period. See the discussion of the HSR Act in Section 1.1 of the Model Agreement. A
signed letter of intent may also assist the buyer in convincing prospective lenders or
investors to evaluate the transaction for the purpose of providing financing. The letter of