Most bank acquisitions start with a conversation and proceed to a letter of intent before the binding definitive purchase agreement is signed. Is a letter of intent necessary? Probably. Having a general understanding of the key terms of the deal before diving into a definitive agreement will probably save you time and money.

There are several key subjects that a well-drafted letter of intent should cover. Foremost among them is the purchase price and the form in which it will be paid. In most bank acquisitions, the price is paid in cash at closing with perhaps an escrow to cover indemnification claims or specific issues like problem loans. Also an important issue, because it involves money, is whether key employees of the seller will be employed after the closing and, if so, if they will have employment agreements. If the key employees or officers are not to be employed after the closing of the sale, it is helpful to point out whether they will be asked or required to enter into non-compete agreements. Setting forth an anticipated closing date is also commonly done.

The letter of intent will also address the treatment or survival of deferred compensation plans and whether other employees in general will be retained or at least given the opportunity to interview for continued employment. A hot topic in almost all bank deals is who will pay the costs of converting or terminating data processing agreements.

Boilerplate terms in a well-drafted letter of intent include:

  • A statement that the parties will pay their own expenses
  • A recitation of the customary conditions to closing like regulatory approval
  • The ability of the buyer to conduct further due diligence leading up to the signing of the definitive agreement, which will allow for more due diligence prior to closing
  • A commitment by both sides to keep the deal confidential
  • A promise of exclusivity, i.e., no consideration of other offers by the seller for a certain period of time
  • A declaration that the letter of intent is not binding on either party

Even though the letter of intent is non-binding, there is a certain moral obligation that attaches to it. From the seller’s perspective, it will want to live by its terms and is often compelled to do so because it will probably experience a substantial change of position as it moves through the process. Its customers and competitors will likely hear the news as will its employees. This may seem strange in light of the promise of confidentiality by both sides, but invariably, the existence of the letter of intent leaks or is at least rumored to exist. Whether it is at a banking convention or the golf course, somebody invariably talks. This makes it imperative on the parties that they are serious about the transaction. It is very damaging to the parties, but especially the seller, if the deal falls through after the signing of a letter of intent.

Another risk is too much reliance on the letter of intent. If either party incurs a substantial change of position in reliance on the terms of the letter with the acquiescence by the other party or the letter itself is too detailed, it is possible that a court will find the terms of the letter binding on the parties. That is why it is important to avoid too much detail in a letter of intent and move quickly to a final agreement.