Letter of Intent

A Letter of Intent or LOI is used to outline the basic terms of a proposed business transaction. The parties to the transaction almost always contemplate that the LOI will eventually be replaced by a definitive agreement. LOIs often set out certain non binding understandings with respect to an acquisition except for certain binding provisions (such as confidentiality, exclusivity, governing law, and payment of expenses), and require that the parties attempt in good-faith to reach a definitive agreement. In certain circumstances, parties may agree to be bound by a few of the business terms (in addition to the confidentiality, exclusivity, governing law, and payment of expenses) and agree to continue to negotiate in good-faith to reach an agreement on all terms. However, in the latter case, if a definitive agreement is not signed, the parties will be bound by those terms and a court may supply the missing terms. The likelihood of a court finding an LOI binding on the parties is discussed further below.

The inherent difficulty in drafting an LOI has created difficulties for both clients and attorneys and generated a substantial amount of litigation. The Illinois Supreme Court once noted that “[l]etters of intent have been characterized by at least one practitioner as ‘an invention of the devil.’” Quake Constr. Inc. v. American Airlines Inc., 565 N.E.2d 990, 1009 (Ill. 1990). However, LOIs are often utilized by parties and serve a number of important purposes. The decision to use an LOI will depend on the various facts and circumstances surrounding a particular transaction and may not be appropriate in every situation.

Clients may wish to enter into an LOI for various reasons. For example, in the absence of a confidentiality agreement as discussed above, an LOI can also serve to maintain confidentiality between the parties. Lenders may require an executed LOI in order to consider providing financing for a possible acquisition. In many cases, a client will want to enter into an LOI to show that progress is being made with respect to a transaction and that, since a few of the critical terms (such as pricing) are likely included in the LOI, the preparation of the definitive agreement will be made easier.

- Thomas N. Hutchinson
Krieg DeVault LLP