Most letters of intent ("LOI") contain some language that makes the LOI non-binding. Does that mean that the parties have no obligations, and can unilaterally back out of the proposed deal?

While each situation is fact-specific, in most situations and subject to some limitations, a party can back out of the deal. However, that does not mean that the parties have not agreed to certain obligations in signing a LOI.

Although often parties will make reference to the fact that they entered into a "non-binding letter of intent", characterizing the LOI in that way is almost always a misnomer. In almost all cases, such a LOI contains both non-binding and binding provisions. While the LOI might be non-binding as it relates to the proposed transaction, the LOI might contain binding provisions on matters such as the following:
  • Confidentiality/non-disclosure. Often the parties will have previously entered into a Confidentiality/Non-Disclosure Agreement, which is binding. The LOI may incorporate that agreement by reference, or may include its own binding confidentiality and non-disclosure provisions. How any such included provisions interrelate to the existing Confidentiality/Non-Disclosure Agreement needs to be considered.
  • Buyer's access to Seller's business for purposes of conducting its due diligence review, and Seller's cooperation with respect to the same.
  • Seller's conduct of the business until the closing or the termination of the LOI.
  • Each party's being responsible for its own costs in connection with the preparation and negotiation of the LOI and any subsequent transaction.
  • "No shopping"—an agreement by the seller not to enter into a purchase and sale agreement with any third party, and not to have any discussions respecting the same with potentially interested parties, for a designated time period, typically sixty days from the signing of the LOI.
  • Payment of a "break-up" fee if the transaction does not close, or if one of the parties chooses to do a deal with someone else.
If the LOI is intended to be non-binding as it relates to the proposed transaction, it needs to include language to that effect. A "Letter of Intent" which does not include non-binding language is a binding agreement. The non-binding language requires careful review by a lawyer experienced in mergers and acquisitions transactions. Often, the language will be ambiguous and create unwanted and unexpected consequences if not corrected.

Even if the non-binding language is not ambiguous, although the parties will not be bound to enter into the proposed transaction, entering into the LOI will create an obligation on the part of each of the parties to negotiate in good faith, unless expressly disclaimed. Good faith of course is a subjective standard of conduct; a person can be acting in good faith subjectively, but be acting unreasonably from an objective standpoint.

An LOI can be an important tool in getting a deal closed, whether you are a buyer or a seller. However, LOIs are important documents, and require input from counsel experienced in mergers and acquisitions transactions.