New Perspectives On the Letter of Intent

In a romance, before a suitor pops the question to an eligible partner, there is often an exchange of gifts. In business, as parties contemplate merger or acquisition activity, the equivalent of a “going steady” token is the letter of intent. In most cases the letter of intent is non-binding. “It does establish a stake in the ground so that buyers and sellers at least agree on a starting point for further talks,” says Mark Weingarten, a partner at the New York law firm Schulte Roth & Zabel. “The whole point of a letter of intent is to flush out fundamental issues that will have to be resolved in a final agreement,” he says. These documents should set out important deal terms without running longer than four or five pages in most situations. A letter of intent is usually preceded by a confidentiality agreement, which states that the parties won’t discuss the potential pact in public or make any business use of each other’s information. A confidentiality document can also include agreements that state that the buyer won’t use company information for any purpose other than evaluating the deal. It can also have a “non-hiring clause” to make sure that the result of the companies’ talks isn’t a job offer. This is to avoid a situation in which “we liked the CFO more than the company, so we made him an offer,” Weingarten says. One trend that the New York-based attorney says he is seeing more often is increasingly detailed letters of intent. There have been two schools of thought about how complex these documents should be. Traditionally, letter-of-intent drafters have opted to leave the document general in order to get the other party engaged in the process, figuring that the dicey parts of the transaction are best negotiated later in the discussions. What Weingarten is seeing now is an uptick in the popularity of talking about potential sticking points early on and including some reference to them in the letter of intent. “If you go this route, you’re figuring that if you’re going to get the deal done, you might as well smoke the problems out up front,” Weingarten says. “Why waste time on a deal that isn’t going to fly?” is an argument proponents of detailed letter of intents would make. Weingarten says he decides which approach to use depending on the specific circumstances of the deal. Letters of intent don’t vary much from industry to industry, with the exception of potential deals in highly regulated industries like utilities and telecommunications. If a transaction is going to face government review at one or more levels, it will slow down the deal process considerably. In these cases, a detailed letter of intent is the way to go. Weingarten offered one tip for sellers who are on the verge of the letter-of-intent stage in a proposed transaction. Usually, buyers draft the letter of intent. Often this is an advantage for the buyers. Most often, they have bought a number of companies, while the seller is only on its first or second acquisition. To offset this experience disadvantage, Weingarten recommends that the seller’s counsel come to the table with a draft letter of intent. This accomplishes two things that may serve as a strategic advantage. “It’s awkward if a seller shows up with a draft and the buyer refuses to even look at it,” Weingarten says. Since at this fairly early stage, the parties are courting each other, the tendency is not to dismiss proposals by either side without giving them at least some consideration. The second advantage – and this would accrue to whoever drafts the letter – is that you tend to sound like the bad guy if there is a document and you are the one who has to pick holes in it and keep coming back with objections.