March 18, 2019

The Letter of Intent, a key document in the purchase-sale operations of a company or asset/s.

Which are its main functions, what points should be captured, and why is convenient to formalize it at the beginning of a negotiation process between buyer and seller.

A Letter of Intent is a document in which both parties of a negotiation declare their commitment, intention, desire and offer to begin or continue a negotiation that has as its final objective a definitive agreement to buy or sell a company.

The Letter of Intent must:

o    Capture any agreements reached to date.
o    Establish the framework from which future negotiations should start.
o    Define the points on which a satisfactory agreement must be reached.
o    Advance an approximate figure of the price to be paid by the buyer for the seller’s shares or assets.
o    Establish mandatory rules of temporary nature in order to manage the future negotiation process, a necessary and binding point when negotiations are prolonged, complex or it is advisable to be aware of risk of failure.
o    Contain statements on the part of the offeror and statements or commitments, even with binding effect that both parties must assume.

The Letter of Intent is sometimes presented as an offer subject to all sorts of future conditions and other times is intended to establish certain non-binding commitments and other binding agreements.

Functions of the Letter of Intent
The Letter fulfils a basic function, to limit the risks that would occur in an open negotiation without compromises. It also binds to future events.

Good faith
The negotiation that must exist before and after the signing of the Letter of Intent is reflected in the Letter of Intent, since it is unequivocal proof that negotiations are taking place. The obligation that the potential seller has with the potential buyer in providing certain information is also more explicit. This reinforces guilt towards one of the parties in case there are preliminary deals or if a negotiating agreement would break these agreements or deals.

Anticipate agreements
The signing of the Letter facilitates the possibility of subsequent and successive consents, whether from the Board of Directors, the public competition authority, etc. The signing of the Letter gives rigour and seriousness as to incur the costs of obtaining such consents.

Determination of the purchase contract
The Letter is necessary for the negotiating process to take place and it is in this negotiating process, after signing the Letter, that the defining elements of the purchase contract are specified.

Necessity to negotiate covenants
The initial phase of a negotiation, in the absence of a Letter of Intent, can put both parties at risk of «bonding». In order to avoid it, in the Letter of Intent, it is agreed that these risks cannot be translated into an obligation through the «diffuse» principle that establishes negotiating in good faith.

Limits to freedom of negotiation, exposure of information and resources in negotiation
The seller provides the buyer with sensitive information that he wishes to be used in a certain way and that its use remains limited to the object of the Letter of Intent. The buyer, by committing economic resources in the negotiation and valuing the company or assets of the seller, will condition by means of a temporary obligatory clause, granting him a period of negotiation with exclusivity so that the seller cannot look for other competing offers during that period.

Financing
Financing organisms are not willing to provide financial leverage to the company if there is no signed Letter of Intent, which gives rigour and seriousness to the negotiation process of the potential buyer and potential seller

Conclusion

The nature of The Letter of Intent is not a contract, nor a pre-contract, it is merely a documentary support for a set of declarations on the part of the buyer and the seller, limiting freedom of negotiation, exposure to sensitive information and conditioning the seller by means of some clause of obligatory compliance (temporary exclusivity to negotiate).

NEWS & VIEWS

Translink Corporate Finance advised Fielmann AG on the acquisition of an 80% stake in Óptica del Penedés (Óptica Universitaria)
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Translink Director’s Meeting October 2019.
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WindCorp acted as the financial advisor to Nazca Capital on the acquisition of an 85% stake of the biopharmaceutical company Diater to the Pharma group Ferrer.
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The Letter of Intent, a key document in the purchase-sale operations of a company or asset/s.