A merger can be a time-consuming and laborious endeavor. Before business parties spend the bulk of the time and incur the bulk of the transaction costs that are necessary to consummate a deal, it is usually prudent to ensure that they have a general understanding of the key terms on which their efforts will be based. A well-drafted letter of intent, or term sheet, is essential to achieving this understanding.
The letter of intent summarizes the central terms of the deal. These terms usually include some or all of the following: legal parties to the transaction; price; form of consideration to be paid by the buyer (e.g., cash, stock, debt, or some combination of the three); legal structure of the transaction (e.g., stock purchase, asset purchase, statutory merger); general description of assets purchased and liabilities assumed or excluded (if asset deal); expected tax consequences; key personnel issues; important technology matters; regulatory requirements (e.g., antitrust approval, SEC filing requirements); certain contingencies (e.g., due diligence investigations, board and shareholder approvals); any escrow arrangement and holdback of a portion of the consideration; and a handful of other terms.
The letter of intent is usually not the final, binding merger agreement between the parties. Instead it provides a roadmap for the parties to negotiate, draft, and sign a more detailed, definitive merger agreement that will serve as the binding contract for the deal.
However, it’s common for the letter of intent to nonetheless contain a few binding terms. For example, the buyer may seek a binding “no-shop” provision which prohibits a seller under certain circumstances from negotiating with other prospective buyers during a limited period of time while the current buyer attempts to get the deal done. The seller may in return seek a fiduciary carveout to ensure that its board of directors can comply with its fiduciary obligations when considering the sale of the business. Other terms may be binding such as expiration date of the letter and selection of the state law that will govern the binding terms.
Other posts in this series (more to come):
Mergers & Acquisitions Primer | Part 1: Introduction
Mergers & Acquisitions Primer | Part 2: Overview of the acquisition process
Mergers & Acquisitions Primer | Part 3: Nondisclosure Agreement
