Recently I’ve had to deal with some questions from clients about the value and enforceability of documents prepared in anticipation of doing a deal. In one case, the binding nature of a letter of intent was in question, and in another, some clients wanted to know what effect a handwritten list of deal items would have on the sale of a business.
The letter of intent, sometimes called a memorandum of understanding, was created by a professional who contemplated most of the essential elements of the deal. The list of deal items, on the other hand, was the result of a casual brainstorming session between two business people who were trying to negotiate a deal that would make them both happy. The two documents look vastly different and seem worlds apart; but the truth is, they’re not that different.
In the lead-up to a major transaction, letters of intent are often used to clarify the major points of a deal such as purchase price, deliverables, timing and any restrictive covenants that might be required by either side. They’re often used liberally because the parties feel like they’re not binding, or not as binding as the final agreement. The truth is that letters of intent can sometimes be as binding as a formally executed agreement – it will all depend on the wording of the document and how well it evidences the intentions of the parties to be bound. A letter of intent that is clearly exploratory will have a different effect than a clearly binding letter.
The list of deal items is little different. A wish list of clauses, drafted by one side, is going to be treated differently than a list of items that actually evidence points agreed to by both parties – particularly if either party is then obligated to undertake any further actions, such as financial disclosure.
In both cases, pre-papering the negotiation of a deal can be incredibly helpful in making the best deal possible, in lowering legal costs, and in keeping a record of the evolution of the deal. But at the same time it’s important to know that the documents, as well as the conversations about the deal, particularly including any letters or e-mail about the terms, may have a legally binding effect. The best practice is to retain counsel when the deal is contemplated and talk to them about what sorts of documents need to be prepared and when. Setting the terms out on paper will reduce the amount of negotiation on the final agreement and should help reduce unexpected surprises.
Scott R. Young