The document discusses letters of intent, including: 1. Letters of intent are non-binding agreements that outline key deal terms for a potential transaction and allow parties to assess compatibility before fully committing. 2. While letters of intent help identify deal breakers early and provide a roadmap for negotiations, they also require time and money to draft and could inadvertently create binding obligations. 3. Attorneys can advise clients on whether a letter of intent makes strategic sense, ensure the letter clearly specifies what terms are binding versus non-binding, and limit potential remedies for breach. Consistent language is important to avoid unintended consequences.

1. TRENDS,
CONSIDERATIONS AND
BEST PRACTICES
February 4,
LETTERS
OF INTENT
2015

2. Partner at Horwood Marcus & Berk
Chartered
• 2015 Illinois SuperLawyers Rising Stars
List
• Co-Chair of the M&A Subcommittee at the
Chicago Bar Association
• Chief Legal Officer, Open Heart Magic
• B.A/J.D. University of Wisconsin-Madison
awerner@hmblaw.com
(312) 606-3211

3. 1. Overview of Letters of Intent
2. Advantages and Disadvantages
3. LOI Provisions: Binding versus Non-binding
4. General Trends
5. Attorney’s Role

4. 1. Indicates intention to proceed to more serious discussions
2. Contains the key deal terms and conditions
3. Typically non-binding (although most will contain binding
provisions)
4. Common in a wide variety of contexts
5. May also be called a “Memorandum of Understanding” or “Term
Sheet”
6. Allows parties to “get engaged before getting married”

5. &ADVANTAGES
DISADVANTAGES
OF USING
LETTERS
OF INTENT

6. 1. Helps identify deal breakers at an early stage, including structure
2. Provides a map and timeline for the transaction
3. May reduce time and cost of completing definitive transaction documents
4. $ and time expenditure signals commitment
5. Binding terms can wrap up exclusivity to get a deal done
6. Informal nature allows parties to draft with minimal assistance of legal
counsel
7. Provides safeguards in the event a deal collapses during later negotiations
8. Provides mental buy-in/moral commitment from both parties

7. 1. Resources required - time and $
2. May result in unexpected outcomes (e.g., inadvertent creation of
binding commitments, inadvertent creation of duty to negotiate in
good faith, etc.)
3. Can lead to loss of leverage

8. NON-BINDING
PROVISIONS

9. 1. Structure of Transaction
2. Price
3. Employee Issues / Retention
4. Expectations on Inventory/Debt/Working Capital
5. Indemnification
6. Conditions Precedent to Closing

11.  Example:
◦ “Except for disclosure to the parties’ respective legal and professional
advisors, commercial lenders and other financing sources, and as
otherwise required by law, the parties will hold all information regarding
this letter of intent, the transactions contemplated hereby and the terms
hereof in strict confidence and will not disclose any such information to
third parties without the prior written consent of the other party hereto.”

12.  Example:
◦ “Company X acknowledges that Company Y has and will continue to expend extensive
time, effort, and costs to conduct its due diligence investigation and to negotiate
definitive agreements in connection with the transaction contemplated by this letter of
intent. Accordingly, for [120] days after the acceptance of this letter of intent, Company
X (i) will negotiate exclusively with Company Y for the purpose of entering into a
definitive written agreement and ancillary agreements contemplated by this letter of
intent with Company Y and (ii) will not solicit, negotiate with or provide any information
to any persons or entities other than Company Y who are or may be interested in
acquiring Company X’s business or any of the assets or ownership interests of
Company X. Company X shall notify Company Y promptly if any such proposal or offer,
or any inquiry or other contact with any person with respect thereto, is made and shall,
in any such notice to Company Y, indicate in reasonable detail the identity of the person
or entity making such proposal, offer, inquiry or other contact and the terms and
conditions of such proposal, offer, inquiry or other contact. Company X shall, and shall
cause it’s respective owners, affiliates, officers, directors, representatives, employees
and agents to, immediately cease and cause to be terminated all existing discussions,
conversations, negotiations and other communications with any persons or entities
conducted heretofore with respect to any of the foregoing.”

13.  Example:
o “Each party will pay, and hold the other party harmless from, all of its respective
expenses incurred in connection with the transaction; provided that, this provision
shall not limit any party’s right to include expenses in any claim for damages
against the other party who breaches any legally binding provision of this letter of
intent.”

14.  Example:
◦ “Company X and Company Y will not make any public statement,
press release, announcement or disclosure concerning the terms
or existence of this letter of intent, the proposed transaction or the
discussions relating thereto, except as may be required by
applicable law or as otherwise may be agreed upon by Company
X and Company Y; provided, however, that any party so required
to disclose any such information must use commercially
reasonable efforts to consult with the other party prior to making
any such disclosure.”

15.  Example:
o “This letter of intent [and the definitive agreements] shall be
governed by and construed under the laws of the state of
Delaware without regard to principles of conflict of laws.
Company X and Company Y irrevocably consent to the
jurisdiction and venue of the state and federal courts located in
Delaware in connection with any action relating to this letter of
intent [and the definitive agreements].”

17. 1. HMB experience in 2014
 Trend towards more information/terms included
 Clients being more receptive to engaging attorney earlier in the
process
2. Others?

19. 1. Advise client on the utility and issues relating to Letter of
Intent
2. Ask the following questions:
 How would an LOI benefit the client in this particular
transaction?
 What will an LOI prevent the client from doing?
 Is there an alternative way to achieve our goals (i.e. non-binding
1 page term sheet with just business terms)?
 What is the overall legal budget for the transaction? Will an LOI
eat up that budget or possibly reduce the overall budget?

20. SIGA Technologies, Inc. v. PharmAthene, Inc.
◦ An express provision requiring the parties to “negotiate in good faith” was contained in definitive
agreements between the parties that were separate from the term sheet.
◦ Delaware Supreme Court ruled that under Delaware law, an express provision to negotiate an
agreement in good faith based on a term sheet marked “Non-Binding” is binding.
◦ Delaware Supreme Court ruled that expectation damages could be awarded if the plaintiff could show
both a violation of good faith and reasonably certain consequences of defendant’s bad faith action.
◦ Key Takeaways:
 Don’t underestimate the binding nature of an agreement to negotiate in good faith. Once such
an agreement has been made, a party will be subject to a duty to follow-through with the deal
negotiations in good faith, irrespective of whether a term sheet is marked “Non-Binding.”
 Consider (i) including provisions that qualify the obligation to negotiate in good faith so that the
terms included in the term sheet are non-binding and open to further negotiation, and (ii)
limiting the remedies available for breaches of the covenant to negotiate in good faith, such as
providing exclusively for liquidated damages.

21. 1. At the LOI stage, the Seller’s position will likely never be better, so it
can be advantageous for a Seller to spend the time/$ on an LOI to
lock in expectations.
2. While an LOI is generally beneficial to both parties, in some cases it
is not necessary or may be counterproductive:
 With a weakened seller, it may make sense as a buyer to skip the
LOI and move quickly move to documenting the deal.
 With parties of equal strength, a highly negotiated LOI may save
time/$ on documenting the final deal due to the specificity
contained in the final LOI.

22. 1. Binding versus non-binding language – use language consistently:
 Non-binding: words that clearly indicate non-binding intent: “would,”
“possible,” “proposed”
 Binding: words that show definite obligations: “shall/will,” “must,” “covenant,”
“agree”
2. Specify and limit any potential remedy for breach.
3. Use clear disclaimers at the beginning and end of the LOI:
 “No past or future action, course of conduct or failure to act relating to a
possible transaction, or relating to the negotiation of the terms of any
possible transaction or definitive agreement, will give rise to or serve as the
basis for any obligation on the part of any party.”
 “[Except for Sections __, __ and __,] this document is nonbinding in every
respect and is for discussion purposes only.”

23. Contact: Aaron Werner at awerner@hmblaw.com
www.hmblaw.com