Team 3 LOI/MOU Presentation

1. LETTERS OF
INTENT/MEMORANDUMS
OF UNDERSTANDING
Luke Salisbury, Kentaro
Tanaka, & Zoe Dixon

2. INTRODUCTION TO THE
LOI/MOU

3. WHAT IS IT?
 Document between potential buyer + potential seller
 Laying out tentative terms
 Before the parties begin formal negotiations of a
merger/purchase agreement
 With the buyer typically preparing first draft
 Similar to term sheets – spelling out most fundamental terms
 Dissimilar to term sheets – LOIs are usually signed by the parties
 Buyer

4. WHAT VALUE DOES AN LOI
PROVIDE
 LOIs are not mandatory. So what determines use? “Facts and
circumstances!”
 Benefits:
 Demonstrate parties’ mutual commitment
 Allocate responsibility for tasks/documents
 Allocate responsibility for expenses
 Establish time frame for tasks/agreements
 Create periods of exclusivity of negotiations (no-shops, etc.)
 Serve as a form of preliminary terms for third parties
 Get the ball rolling with HSR filing

5. WHAT VALUE DOES AN LOI
PROVIDE
 LOIs are not mandatory. So what determines use? “Facts and
circumstances!”
 Benefits:
 Promote efficient use of time and money
 Could expose weaknesses
 Could identify deal-breakers
 Could raise disclosure issues for public companies
 Allow things to go smoother if parties progress to negotiating

6. AN LOI INCLUDES: NONBINDING
DEAL POINTS
 Most provisions are deal points and are non binding
 Examples:
 Purchase price
 Key ancillary agreements
 Important conditions

7. AN LOI INCLUDES: SOME BINDING
TERMS
 There are some exceptions to typical nonbinding nature of LOI
terms
 Examples:
 Exclusivity period (no-shop, etc.)
 Expense reimbursement
 Break-up fees
 Nondisclosure obligations
 Procedures for making public announcements
 Termination provisio

8. TO DETERMINE BINDINGNESS,
COURTS LOOK TO:
 The actual words of the document (*most important*)
 The context of the negotiations
 Whether parties have partially performed their obligations
 Whether there are any issues left to negotiate
 Whether concerns complex business matters typically requiring
written agreement

9. HOW CAN A PARTY AVOID COURT
ENFORCEMENT?
 Make clear a provision’s nonbinding nature:
 Specifically state which provisions are binding and in what
situations
 State in binding provision that the rest is nonbinding
 Include fiduciary outs
 ...with definite and precise language
 Expressly disclaim obligation to negotiate in good faith
 State negotiations may be terminated whenever, why-ever, and by
whomever
 ...until definitive docs are signed
 Avoid statements or actions indicating parties understood LOI to be
binding,
 ...including oral statements

10. EXPLANATION OF LOI
PROVISIONS

11. NON BIDING PROVISIONS
 Basic transaction ex. Share purchase transaction or not.
 Price Cf. detail clause may trigger disclosure obligations, if either party is a
public company
 Employment and noncompetition agreement Cf. scope and
term is important
 Other terms
・Comprehensive Representations and warranties to the Buyer
・Comprehensive Covenants
・Comprehensive Conditions

12. BIDING PROVISIONS
 Access to
information
 Exclusive dealing
 Break-up fee
 Conduct of Business
 Confidentiality
 Disclosure
 Costs
 Consents
 Entire Agreement
 Governing law
 Jurisdiction
 Termination
 Counterparts
 No liability on non biding
provision

13. EXPLANATION OF SOME
IMPORTANT BIDING PROVISIONS-
ACCESS TO INFORMATION-
During the period from the date this letter is signed by the Sellers (the Signing Date)
until the date on which either Party provides the other Party with written notice that
negotiations toward a Definitive Agreement are terminated (the Termination Date), the
Sellers will afford the Buyer full and free access to each Target Company, its personal,
properties, contracts, books and records, and all other documents and data.
Sellers should limit the obligation to “reasonable” range.
 Sellers may reluctant to disclose certain information about the sensitive
areas until after the definitive agreement is executed. →Sellers need to
curve out.
Example
Comment

14. EXPLANATION OF SOME
IMPORTANT BIDING PROVISIONS-
CONDUCT OF BUSINESS-
During the period from the Signing Date until the Termination Date, the Sellers shall cause the
Target Companies to operate their business in the ordinary course and to refrain from
extraordinary transactions.
 Buyers will want to restrict the Sellers from shifting assets or otherwise affecting the
operations of the Company in a way that may reduce the Company’s value.
 This provision could be modified to require Sellers only to notify Buyers in advance of any
extraordinary transactions or conduct outside the ordinary course of business.
 If Buyers involves itself too directly in the operation of the Company’s business prior to the
signing of a definitive agreement. Such involvement may be a factor used by the court to
determine that the parties intended the letter of intent to bind them to the proposed acquisition.
Computer Systems of America, inc. v. IBM Corp
→the Buyers should take care not to involve itself too directly!!
•Used most frequently in public company transactions
Example
Comment

15. EXPLANATION OF SOME
IMPORTANT BIDING PROVISIONS-
CONFIDENTIALITY-
 If confidentiality agreement is entered prior to negotiating a letter of
intend, this provision is not needed or modified to reference the prior
agreement
 In practical, if a transaction is a stock purchase transaction, below term is
important in confidential provision.
“After the completion of the Share Transfer, the confidential obligation shall
not be applicable to the Buyer for Confidential information regarding Target
Company.”
If this clause does not include, the Buyer continues to have confidential
obligation for Confidential information regarding Target Company to the
Seller after closing.
→It is not reasonable.
•Used most frequently in public company transactions

16. EXPLANATION OF SOME
IMPORTANT BIDING PROVISIONS-
GOVERNMENT LAW & JURISDICTION-
 You should be aware of the jurisdiction’s case law regarding the
enforceability of letters of intent and the pitfalls that must be considered. #
the detail will explain later.
 Especially, when the transaction is international, government law and
jurisdiction are so important.
→For example, even if a Japanese company wins a Chinese company in
Japanese court, Japanese company can not enforce it in China.
→Arbitration is useful, but you need to check whether the other party attends
New York Treaty or not.
•Used most frequently in public company transactions

17. ENFORCEABILITY OF AN
LOI

18. CHOICE OF LAW PROVISIONS
Certain Jurisdictions will enforce agreements to negotiate
 California, Delaware, New York and Washington
Other Jurisdictions have explicitly refused to enforce these
agreements
 Georgia, Hawaii, Michigan, Virginia
Makes choice of law provisions extremely important
No one wants to leave the governing law up to chance
Absent an explicit provision; the location of the parties, the location
of negotiations, and subsequent actions of the parties can create,
modify or negate enforceable obligations.

19. DIFFERENT PATHS
Binding Obligation to Negotiate
Damages are possible
 Reliance traditionally
 New case law has allowed for
Expectancy damages
 Maybe even specific performance?
Exclusivity Only
Useful if the agreement is to be
used as a “jumping off point”
Has been interpreted to create an
implied duty of good faith to
negotiate in some states
 EQT infrastructure limited (New York)

20. SOMETIMES LESS IS MORE
Those cases where Expectancy damages were awarded included
extremely detailed term sheets
If you have a detailed term sheet and are:
 Use express language allowing for renegotiation of any and all conditions, listed or
unlisted in the term sheet
 Explicitly reserve the right not to be bound by any term
 Disclaim any intent to be bound by any term or future action
 Perhaps choose governing law from a state that does not enforce agreements to
negotiate?