M&A Letter of Intent

1. Presenting a live 90‐minute webinar with interactive Q&A
M&A Letters of Intent:
M&A Letters of Intent:
Strategies for Sellers and Buyers
Crafting Preliminary Deal Terms and Conditions
T d ’ f l f
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, OCTOBER 11, 2011
Today’s faculty features:
B. Scott Burton, Partner, Sutherland Asbill & Brennan, Atlanta
Mark D. Williamson, Principal, Gray Plant Mooty, Minneapolis
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5. M&A Letters of Intent:
Strategies for Sellers and Buyers
B. Scott Burton
Mark D. Williamson
October 11, 2011

6. Letter of Intent
Letter of Intent
• What Is It?
What Is It?
– Generally a brief document indicating the parties’
intention to proceed with the negotiation of a definitive
agreement
– Contains the basic terms of the proposed deal
Typically a nonbinding document (although
– Typically a nonbinding document (although
sometimes containing binding provisions)
– Sometimes referred to as (and perhaps formatted as)
( p p )
a “term sheet,” a “memorandum of understanding”
and sometimes, the seemingly oxymoronic
“preliminary agreement”
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preliminary agreement

7. Attorney’s Role
Attorney s Role
• Advising client on the utility of and issues
g y
relating to an LOI
• Attorney should review and comment on letter of
intent before it is signed
intent before it is signed
– Critical to make sure binding and nonbinding
provisions are drafted properly
Business people often take the first attempt at
• Business people often take the first attempt at
an outline or term sheet to be converted into the
letter of intent
• Sometimes terms that may be vigorously
negotiated when lawyers are present may be
conceded by the business people
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conceded by the business people

8. Is a Letter of Intent Necessary?
Is a Letter of Intent Necessary?
• A letter of intent is not necessary and not
A letter of intent is not necessary and not
always desirable.
• Parties can proceed directly to the drafting
• Parties can proceed directly to the drafting
and negotiating of a definitive agreement
without signing a letter of intent
without signing a letter of intent.
• Alternative: Use short, non-binding term
h t ith b i d l t
sheet with basic deal terms.
8

9. Why Consider a Letter of Intent?
Why Consider a Letter of Intent?
• Is the client a motivated Seller or Buyer?
Is the client a motivated Seller or Buyer?
• Is there an immediate need to begin diligence?
• Is exclusivity crucial?
Is exclusivity crucial?
• Is the transaction too detailed/complex to begin
negotiation of the “definitive” deal document?
negotiation of the definitive deal document?
• Are approvals (e.g., from investors, lenders,
regulators) needed for the deal?
egu ato s) eeded o t e dea
• Is a timeline/deadline crucial?
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10. Advantages of Using
L f I
Letters of Intent
• Isolates and memorializes key deal points or
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identifies deal breakers
• Provides a map and timeline for the transaction
• Governs the parties’ relationship to the signing
• Governs the parties relationship to the signing
of definitive documents
• Provides a vehicle for binding obligations (e.g.,
g g ( g ,
exclusivity, expense allocation, confidentiality)
• Can be used with regulators (e.g., HSR filing),
financing sources and other constituencies
financing sources and other constituencies
• Demonstrates the seriousness of the parties
• Creates “moral commitment”
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11. Disadvantages of Using
L f I
Letters of Intent
• Certain provisions can lead to loss of leverage
p g
– For Seller, exclusivity provision
– For Buyer, too much detail on deal terms
• May inadvertently create a binding agreement
• May inadvertently create a binding agreement
as to certain deal points along with potential
liability
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• May create a duty to negotiate in good faith
• Potentially triggers public disclosure obligation if
binding
binding
• Nonbinding nature of letters of intent does not
always justify the expenditure of time and money
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12. Typical Provisions of a Letter of Intent
Typical Provisions of a Letter of Intent
• Form of Transaction
– Stock Purchase
– Asset Purchase
– Merger or Reorganization
• Price
Amount
– Amount
– Form of consideration/timing of payments (cash,
stock, earnout, promissory notes, etc.)
– Source of funds
– Escrow
Purchase price adjustments
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– Purchase price adjustments

13. Typical Provisions of a Letter of Intent (cont.)
Typical Provisions of a Letter of Intent (cont.)
• Other Material Terms
– Extent of representations and warranties
– Indemnification obligations
– Non-compete obligations
p g
– Key employment issues
• Conditions to Transaction
Completion of Buyer’s due diligence
– Completion of Buyer s due diligence
– Receipt of necessary financing
– Execution of definitive agreements
No material change in Seller’s business or results
– No material change in Seller s business or results
– Receipt of third party/governmental consents
• Milestones/Benchmarks
13

14. Typical Provisions of a Letter of Intent (cont.)
Typical Provisions of a Letter of Intent (cont.)
• Other Obligations
Other Obligations
– Buyer’s right to investigate and have access
to business
to business
– Exclusive Dealing/“No-Shop” Clause (with a
possible fiduciary out if a public target)
possible fiduciary out if a public target)
• Break-up Fee?
– Confidentiality obligations (unless separate
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confidentiality agreement was signed)
– Ordinary course conduct of business
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15. Provisions of a Letter of Intent
Provisions of a Letter of Intent
• Contractual “boilerplate”
Contractual boilerplate
– Choice of law
Venue selection
– Venue selection
– Merger clause
Responsibility for expenses
– Responsibility for expenses
– Termination provisions/survival provisions
Si t
– Signature
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16. Letters of Intent:
Th B ’ P i
The Buyer’s Perspective
• Exclusivity – eliminate other bidders
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– No-shop provisions
– Notice of other approaches
• Expense Reimbursement/Break-Up Fee?
Expense Reimbursement/Break Up Fee?
• Access to Information
– Books and Records
M t i l C t t
– Material Contracts
– Real Estate
– Customers
E l
– Employees
– Advisors (e.g., outside counsel for litigation assessment)
• Operating Covenants
16

17. Letters of Intent:
Th S ll ’ P i
The Seller’s Perspective
• Seller’s leverage may be highest at this point in
g y g p
a transaction
• Preservation of Confidentiality (if not previously
dd d)
addressed)
• No-Hire/Non-Solicitation of Employees
Subject Employees
– Subject Employees
– Possible Exceptions
• Limited Access to Information/Personnel
Limited Access to Information/Personnel
• Reverse Diligence of Buyer
• Other Specific Terms/Transaction Details
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p

18. Letters of Intent:
L l P i i l
Legal Principles
• Binding vs Nonbinding
Binding vs. Nonbinding
– Letter of intent should be clear on whether or
not parties intend document to be binding
not parties intend document to be binding.
– Parties’ intent is generally upheld if properly
stated.
stated.
– Often the parties want certain provisions to be
binding and others to be nonbinding.
g g
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19. Binding vs Nonbinding
Binding vs. Nonbinding
• If there is a manifest intention that formal
If there is a manifest intention that formal
agreement is not to be complete until reduced to
formal writing, there is no binding contract.
• Courts will look at language of letter of intent to
determine if parties intended to be bound.
• Courts sometimes look to the conduct of the
parties to determine if there was an intention to
b b d
be bound.
19

20. Binding vs Nonbinding
Binding vs. Nonbinding
Texaco, Inc. v. Pennzoil Co.
• Memorandum of agreement with Pennzoil to purchase
Getty Oil
• Parties issued separate press releases
• Parties issued separate press releases
– Announced “agreement in principle”
– Stated “transaction is subject to execution of a definitive merger
agreement”
agreement
• Subsequently, Texaco made better offer
• Board withdrew its counter-proposal and entered into
agreement with Texaco
• Pennzoil sued for intentional interference with contract
• Question was whether there was a binding contract?
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Question was whether there was a binding contract?

21. Binding vs Nonbinding
Binding vs. Nonbinding
Texaco v. Pennzoil (cont.)
T li d b
• Test applied by court:
(1) Whether a party expressly reserved the right to be bound only when
a written agreement was signed;
(2) whether there was any partial performance by one party that the
( ) y p p y p y
party disclaiming the contract accepted;
(3) whether all essential terms of the alleged contract had been agreed
upon; and
(4) whether the complexity or magnitude of the transaction was such
( ) p y g
that a formal executed writing would normally be expected.
• Court noted: “Although the intent to formalize an agreement is some
evidence of an intent not to be bound before signing such a writing,
it is not conclusive. The issue of whether the parties intended to be
it is not conclusive. The issue of whether the parties intended to be
bound is a question of fact to be decided from the parties acts and
communications.”
21

22. Binding vs Nonbinding
Binding vs. Nonbinding
Texaco v. Pennzoil (cont.)
• Reviewed press release
– Worded in indicative terms (“seller will”), not subjunctive or
hypothetical ones
R f t f t t t bli h d ti i d t
– Reference to future agreement established timing and not a
precondition of agreement
• Also evidence indicated that most essential elements
were present (most importantly price) even though
were present (most importantly, price), even though
there were other open terms (e.g., guarantees).
• Court concluded that there was sufficient evidence to
support jury verdict finding that there was a contract
support jury verdict finding that there was a contract.
• However, jury damages award was reduced from $10.7
billion to $3 billion.
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23. Binding vs Nonbinding
Binding vs. Nonbinding
Turner Broadcasting v. McDavid
I l d l f i ll A l H k d Th h
• Involved letter of intent to sell Atlanta Hawks and Thrashers
• Letter, by its term, expired, but parties continued to negotiate
• Georgia Court of Appeals held:
Sufficient evidence that parties had reached an agreement on all
– Sufficient evidence that parties had reached an agreement on all
material terms and “manifested an intent to be bound.”
– Statute of Frauds did not require that complex, expensive business
matters be in writing
Upon termination Turner no longer benefited from “nonbinding”
– Upon termination, Turner no longer benefited from nonbinding
disclaimer
– Evidence sufficient that breach prevented prospective buyer from
obtaining approvals and thus buyer was entitled to more than nominal
damages
damages
– Award of $281 million not excessive
• Key Takeaway: Ensure that nonbinding nature of letter of intent
survives termination
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24. Binding vs Nonbinding
Binding vs. Nonbinding
White Const. Co., Inc. v. Martin Marietta Materials, Inc.
Whit C t ti l i d th t M ti M i tt ’ d t ft i i f
• White Construction claimed that Martin Marietta’s conduct after signing of
letter of intent – repeated promises to go through with deal, partial
performance by negotiating lease contract – was sufficient to create binding
agreement
• The court concluded otherwise noting that the LOI included the following
• The court concluded otherwise, noting that the LOI included the following
provision, which the court stated unambiguously showed that the parties did
not intend to be bound by the letter’s terms:
This nonbinding letter describes the basic terms of the proposed transaction,
along with various examinations of [target] that must be concluded to the
g [ g ]
satisfaction of [Martin Marietta] prior to the execution of the legally binding
agreement. THIS LETTER EXPRESSES THE INTENT OF THE PARTIES FOR
DISCUSSION PURPOSES ONLY FOR USE IN DRAFTING A DEFINITIVE
CONTRACT. THIS LETTER IS NOT INTENDED TO CREATE NOR SHOULD
IT BE CONSTRUED AS CREATING ANY LEGAL OBLIGATION TO
CONCLUDE THIS TRANSACTION UNDER THE TERMS OUTLINED HEREIN
OR ON ANY OTHER TERMS OR CONDITIONS NOR IS IT INTENDED TO
CREATE ANY OTHER OBLIGATION EXCEPT FOR THE [EXCLUSIVITY AND
CONFIDENTIALITY] OBLIGATIONS...
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25. Letters of Intent:
D f i C id i
Drafting Considerations
• If no binding intent is contemplated, use words
If no binding intent is contemplated, use words
that clearly indicate no binding intent: “would,”
“possible,” “proposed”
• Use binding words only if you mean them:
“shall/will,” “must,” “covenant,” “agree”
• Be consistent – use only binding words in the
binding parts and nonbinding words in the other
parts
• Specify and limit any potential remedy for breach
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26. Letters of Intent:
D f i C id i
Drafting Considerations
• Use explicit disclaimers of nonbinding provisions
p g p
• Disclaimers should include provisions like the following:
– Document is nonbinding in every respect and is for discussion
purposes only.
p p y
– There is no agreement relating to the subject matter, whether
written or oral, and there is no agreement to agree.
– The parties will not be bound in any respect unless and until a
p y p
written definitive agreement is signed and executed.
– No past or future action, course of conduct or failure to act
relating to a possible transaction, or relating to the negotiation of
th t f ibl t ti d fi iti t ill
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.
• Disclaimer should expressly carve out binding provisions
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• Disclaimer should expressly carve out binding provisions

27. Letters of Intent:
O h C id i
Other Considerations
• The “real” intention of the parties is a primary factor
p p y
• It is not an “all or nothing” proposition – some parts can
be held to be binding, yet other parts not
• Surrounding conduct before and after the letter’s
• Surrounding conduct – before and after the letter s
execution – can be crucial
– verbal/non-verbal communication (e-mails can be loaded
weapons)
weapons)
– partial performance
– press release language
Bottom line realities govern
• Bottom line – realities govern
– Make sure letter reflects reality and conduct remains consistent
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28. Duty to Negotiate in Good Faith
Duty to Negotiate in Good Faith
• Alternative claim that is typically separate
Alternative claim that is typically separate
from breach of contract
• Some courts have found a separate duty
Some courts have found a separate duty
– Does not exist in all jurisdictions
• Duty does not ensure a deal will be done;
Duty does not ensure a deal will be done;
rather, it implies directional negotiations to
at least try (i.e., no abandonment)
y ( , )
• What is the proper measure of damages –
reliance damages only?
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g y

29. What if It Goes Wrong?
What if It Goes Wrong?
• Possible Measure of Recoverable Damages
Expectation Damages intended to place the non breaching party in the same
– Expectation Damages – intended to place the non-breaching party in the same
position as it would have been had the breaching party performed
– Reliance Damages – intended to compensate non-breaching party for expenses
incurred in reliance on breaching party’s promise
• To Be Recoverable Damages Must Be
To Be Recoverable Damages Must Be
– Capable of calculation within a degree of reasonable certainty
– Reasonably foreseeable as a result of a breach at the time the parties enter into
an agreement
• What Courts Have Done
What Courts Have Done
– Courts have generally held that expectation damages, i.e., lost profits or
consequential damages, are not available for the breach of binding provision,
such as an exclusivity or non-solicitation provision, contained in a nonbinding
preliminary agreement, such as a letter of intent or term sheet
Only a handful of jurisdictions have addressed the issue though and expectation
– Only a handful of jurisdictions have addressed the issue though, and expectation
damages remain a possibility
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30. Recommended Resources:
A i l & B k
Articles & Books
• Model Stock Purchase Agreement, 2nd Ed., ABA
g
Publishing (2010) (specifically Ancillary Document B)
• Special Study for Corporate Counsel on Using Letters of
Intent in Business Transactions (2010 Edition),
Intent in Business Transactions (2010 Edition),
Thomson-West (2010)
• Spreen, Kristopher, "Ten Practice Tips for Negotiating
the Letter of Intent " Deal Law 13 (May June 2008)
the Letter of Intent, Deal Law 13 (May-June 2008)
• The M&A Process – A Practical Guide for the Business
Lawyer, ABA Publishing (2005)
• Williamson, Mark D., “Letters of Intent: Their Use in
Minnesota Business Transactions,” Minnesota Bench
and Bar (November 2007)
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( )

31. Recommended Resources: Cases
Recommended Resources: Cases
• Teachers Insurance and Annuity Association of America v. Tribune Co., 670
F Supp 491 (S D N Y 1987)
F.Supp. 491 (S.D.N.Y. 1987)
• Texaco, Inc. v. Pennzoil Co., 729 S.W.2d 768 (Tex. App. Houston 1st Dist.
1987)
• Goodstein Constr. Corp. v. City of New York, 604 N.E.2d 1356, 1361 (N.Y.
1992)
1992)
• Venture Associates Corp. v. Zenith Data Systems Corp., 96 F.3d 275 (7th
Cir. 1996)
• Vestar Dev. II, LLC v. Gen. Dynamics Corp., 249 F.3d 958 (9th Cir. 2001)
L D W Si C 169 P 3d 1255 (O 2007)
• Logan v. D.W. Sivers Co., 169 P.3d 1255 (Or. 2007)
• Global Asset Capital v. Rubicon US Reit, Inc., C.A. No. 5071-VCL (Del. Ch.
Nov. 16, 2009)
• Turner Broadcasting System v. McDavid, et al., 303 Ga. App. 593, 693
S E 2d 873 (2010)
S.E.2d 873 (2010)
• White Const. Co., Inc. v. Martin Marietta Materials, Inc., 2009 WL 961135
(M.D. Fla. 2009)
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32. Faculty
Faculty
Mark D. Williamson, Principal
Gray Plant Mooty Minneapolis
Gray Plant Mooty, Minneapolis
– Mark practices in the areas of business, corporate, and securities law, with a
focus on mergers and acquisitions. He serves as Co-Chair of the firm’s Mergers
& Acquisition Team. He has experience representing both public and private
companies and private equity funds in various corporate transactions, including
i iti bli d i t ff i t d ff d d bt
mergers, acquisitions, public and private offerings, tender offers, and debt
financings. Mark.Williamson@gpmlaw.com.
B S tt B t P t
B. Scott Burton, Partner
Sutherland Asbill & Brennan LLP, Atlanta
– Scott focuses on corporate mergers and acquisitions, corporate finance and
securities, and general corporate and securities matters. He heads the firm’s
Financial Services Industry Transactional Practice Group His experience
Financial Services Industry Transactional Practice Group. His experience
includes representing buyers and sellers in acquisitions and dispositions of
private and publicly held life and property and casualty insurance companies,
blocks of insurance business, broker-dealers and investment advisers.
scott.burton@sutherland.com.
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