A letter of intent (LOI) is a document that outlines the details of a corporation’s intention to carry out a specific corporate action. It is a letter that acknowledges the willingness of two companies to enter into business.
A letter of intent differs from a contract in the sense that it is not legally binding on the parties completely and hence, cannot be enforced. However, some LOIs do contain provisions which are binding such as a non disclosure agreement or a covenant to negotiate in good faith.
Letters of intent are conceptually similar to heads of agreement in the way that the latter is also a legally non – binding document, outlining only the main relevant issues of the agreement. Examples include Asset Purchase Agreements, Share Purchase Agreements and Joint - Venture Agreements.
Generally, a letter of intent is issued by the Management and Legal Council of the concerned corporation. It can also be issued by a mutual fund shareholder to express his intention to invest a certain sum of money at a certain time, so that he can avail the benefit of reduced sales charges.
A letter of intent is often loosely referred to as a memorandum of understanding (MOU) but the two differ significantly. A LOI essentially outlines a bilateral agreement and requires only that party which expresses the intention to carry out business with the other, to sign the letter of intent. A MOU outlines a multilateral agreement and hence requires the signature of all the parties involved.
Sometimes, a letter of intent is referred to as a term sheet also, mainly because they do not vary much in legal terms but only in the way they are structured. LOI is written in a letter form and emphasizes on the intention of the parties. A term sheet is in a bullet point summary form and provides a list of the deal terms.
SOME EXAMPLES WHERE ALETTER OF INTENT IS USED During a merger and acquisitions process: to reveal the specific terms of the deal – whether it is a cash or stock deal. In construction and engineering: when the parties need to start working before the agreement of the formal contract terms or the formal contract price. In real estate cases where the real property in question is not listed on a multiple listing service: to officially begin the process of purchase by informing the owner of the party and other interested parties. In solicitation of government grants: to allow the agency staff to estimate the workload and plan the