Documentation Preliminary agreements
What preliminary agreements are commonly drafted? Belgium Van Bael & Bellis
Letters of intent A letter of intent is used in the majority of transactions. The level of commitment of the parties to deal completion may differ. However, parties should take into account the fact that an agreement has in principle binding force as soon as the parties agree on both the:
- price (or the calculation of the price); and
- object of the transaction.
Parties may nevertheless deviate from this rule but should include this explicitly in the letter of intent. It is, therefore, not sufficient just to mention ‘subject to contract’ or other standard sentences that are common in Anglo-Saxon style letters of intent.
Typically, a letter of intent contains a number of binding clauses (eg, clauses on exclusivity and confidentiality), as well as non-binding clauses and assumptions or conditions that should be fulfilled to allow for the deal to go through.
Exclusivity agreements Often the potential buyer will request exclusivity for one to three months. This clause is typically inserted into the letter of intent, but parties may also enter into separate agreements on exclusivity. In principle, a transfer in breach of such agreement may not be unwound, but the seller may be held liable for damages. A court will unwind the transaction only if it has been established that the third-party acquirer was aware of the exclusivity agreement and the fact that the transfer would be a breach of such agreement. In that case, the third-party acquirer may also be held liable for damages.
Non-disclosure agreements Depending on the sensitivity of the transaction, the parties may also enter into a non-disclosure or similar confidentiality agreement. This is sometimes part of a letter of intent, but parties often execute a non-disclosure agreement at an earlier stage of the negotiations.
Most agreements typically provide for standard exceptions such as disclosure required by law or with the prior approval of the other party.
A party may claim damages if the other party breaches the confidentiality undertaking. As it may be difficult to prove damages resulting from such breach, contractual lump sum indemnities are often provided. However, due to the difficulties related to establishing a breach of the undertaking, enforcement is rare.
Bermuda BeesMont Group
Letter of intent A letter of intent will normally be negotiated and will broadly set out the type of transaction being contemplated, its timing and any applicable key terms and conditions, including:
- the type and amount of consideration to be paid;
- the types of warranties to be given; and
- any non-compete covenants that may be given.
Letters of intent are usually non-binding, with the exception of certain provisions such as those concerning exclusivity, confidentiality, access to information or cooperation during the due diligence period and governing law. A term sheet, heads of agreement or memorandum of understanding can be executed instead of a letter of intent, as they contain the same information.
Non-disclosure agreement A mutual non-disclosure or confidentiality agreement is typically entered into and provides that:
- the buyer will use the information only for the purpose of evaluating the acquisition; and
- neither party will disclose information to third parties about the negotiations.
It is important for confidential information to be fully outlined, including any necessary carve-outs or exceptions. Typically the buyer and seller will want to provide that the non-disclosure provisions extend to any agents, advisers or employees of the other party. The seller will also want to try to ensure that the buyer will not solicit any of the target's employees, suppliers or clients.
Exclusivity agreement Exclusivity provisions are typically built into the letter of intent or non-disclosure agreement. However, if this is not the case, a separate exclusivity agreement is often sought by the buyer because it allows the buyer to negotiate the acquisition with the seller for a period of time without threat of another potential buyer being identified. The buyer will generally want to negotiate for a longer exclusivity period while the seller will want a shorter period.
Due diligence request list A due diligence request list will usually be compiled by the buyer and include all items that the seller must disclose in relation to the target (and group) in order to carry out its due diligence before the acquisition. There may be negotiations involved between the buyer and seller over this due diligence list.
Canada Gowling WLG
The two most common preliminary agreements that are drafted to commence the acquisition of a private corporation are:
- a letter of intent – a non-binding document, in most respects, that summarises the principal terms and conditions of the proposed transaction. A letter of intent will typically contain some binding provisions, including a no-shop covenant from the seller and mutual confidentiality provisions; and
- a confidentiality and non-disclosure agreement (NDA) – an agreement which restricts the collection, use and disclosure of the information conveyed by the target for the sole purpose of evaluating the proposed transaction.
If the selling shareholders want to solicit multiple bids for the acquisition of the target, they (or their M&A advisers) will generally prepare a teaser document summarising the target and potential acquisition opportunity in order to generate interest. Once potential bidders have executed an NDA, they will usually receive a confidential information memorandum (CIM) prepared by the sellers which includes a greater level of detail of information on the target in order for potential bidders to decide whether to submit a bid and continue in the bidding process.
China Baker McKenzie
The initial phase of M&A transactions will ordinarily involve discussions between the seller and the buyer on the commercial and legal parameters for the transaction. Often, these parameters will be recorded in a heads of agreement, letter of intent or memorandum of understanding, which may or may not be legally binding.
Even if not expressed as legally binding, it is common for a period for exclusive negotiation to be agreed; and for the buyer to undertake confidentiality obligations (either as part of the letter of intent, or as a separate non-disclosure agreement) with respect to the information it will receive on the target.
Denmark Danders & More
Customary preliminary agreements are non-disclosure agreements, non-solicitation agreements and exclusivity agreements. The parties often also choose to negotiate a letter of intent or a term sheet before entering into sales and purchase agreement negotiations.
Germany Skadden Arps Slate Meagher & Flom LLP
Before due diligence and the share purchase or asset purchase agreement, the parties will normally agree to a confidentiality agreement or non-disclosure agreement concerning all of the data that will be exchanged between them and, in some cases, a process letter which contains a disclaimer to minimise liability. Following this first step, buyers and sellers commonly conclude a letter of intent or a letter of interest which can be binding or non-binding. The letter outlines the intended transaction and usually provides a timeline for the next steps. An exclusivity agreement forbidding negotiations with other potential buyers during the transaction is often requested by the bidder and granted by the seller if it is in a strong position. In addition, a term sheet is sometimes included in the letter of intent/interest which documents the key features of the later purchase agreements. The term sheet minimises the risk that the transaction will fail because of these main points before commencing potentially expensive due diligence.
Greece Karatzas & Partners Law Firm
Typically, preliminary agreements include:
- a confidentiality agreement ensuring the secrecy of commercially sensitive information;
- a non-binding memorandum of understanding with binding confidentiality clauses;
- an exclusivity agreement by which the target is legally committed to the potential buyer not to deal with competing buyers for a period during which only the potential buyer can conduct due diligence and resolve on the acquisition;
- a framework agreement;
- a letter of intent; and
- a share purchase agreement with conditions for closing.
Guernsey Carey Olsen
Typically, the parties will enter into heads of terms to record the non-binding terms of the deal at that stage. The heads of terms may also:
- grant exclusivity to the buyer;
- impose non-disclosure obligations on the buyer in relation to the due diligence information provided; and
- impose non-solicitation obligations in relation to staff, customers and suppliers.
The UK City Code on Takeovers and Mergers restricts a target's ability to enter into pre-deal commitments with a potential bidder which may reduce its ability to deal with or recommend a competing bid.
Hong Kong Baker McKenzie
The initial phase of M&A transactions will ordinarily involve discussions between the seller and the buyer on the commercial and legal parameters of the transaction. Often these parameters will be recorded in a heads of agreement, letter of intent or memorandum of understanding, which may or may not be legally binding.
Even if not expressed as legally binding, it is common for a period for exclusive negotiation to be agreed and for the buyer to undertake confidentiality obligations (either as part of the letter of intent or as a separate non-disclosure agreement) with respect to the information that it will receive on the target.
In case of an acquisition, the parties generally execute a memorandum of understanding or term sheet to record the broad terms and conditions of a proposed transaction until the execution of definitive documentation. These documents are generally made as a statement of intent and accordingly may not be binding on the parties. However, the parties are free to make certain clauses (eg, confidentiality and exclusivity) binding and enforceable.
Italy Nctm Studio Legale
Parties usually enter into the following preliminary agreements:
- Letters of intent – the parties set out the main terms and conditions of the transaction by providing both binding (eg, exclusivity and confidentiality) and non-binding provisions (eg, scope, consideration, process, timing and other material terms).
- Exclusivity or standstill provisions (which can also be contained in the letter of intent) – the parties may agree to be the sole negotiating parties for a certain period during a perspective transaction.
- Non-disclosure agreements – both parties agree to keep certain information provided by the other party confidential.
Jersey Carey Olsen
It is common for heads of terms and non-binding offer letters to be drafted in order to outline the basic terms of a proposed M&A transaction. It is also common for exclusivity, non-disclosure or similar confidentiality agreements to be prepared and entered into at the start of an M&A transaction.
Malaysia Tay & Partners
Exclusivity agreements Exclusivity agreements prohibit undertakings from the seller or buyer from negotiating with a third party in order to sell or deal with the subject matter of the sale for a prescribed period. Remedies may be limited to damages only for breach of the agreement. An exclusivity agreement or arrangement can be part of a letter of intent or term sheet.
Letters of intent A letter of intent or term sheet is usually entered into before the signing of any formal contract. Letters of intent or term sheets are often described as not legally binding. They typically set out:
- the parties’ understanding, principal terms of the transaction and other provisions to allow the buyer to carry out due diligence and investigate the target’s assets and liabilities; and
- the relevant timeframe for completion and signing of the formal contract.
Non-disclosure agreements Under a non-disclosure agreement, a party agrees not to disclose any information received from the other party to an unauthorised third party. These agreements are typically entered into in order to protect the prospective seller from unauthorised use of information made available to the prospective buyer during the transaction. However, it may be necessary for the prospective seller or buyer to make disclosures and announcements to certain authorities, pursuant to requirements under the applicable securities law or the Bursa Malaysia Listing Requirements. Injunctive relief is usually sought for a breach of a non-disclosure agreement.
Peru Rodrigo Elías & Medrano Abogados
The most common preliminary agreements are confidentiality agreements, memoranda of understanding, letters of intent and term sheets. Where several parties bid to acquire the same target, the bidders must submit indicative non-binding offers during the early stages of the sale process.
For sales of private companies, in most cases letters of intent, memoranda of understanding and/or term sheets are used as preliminary documents. These documents set out the transaction process and in most cases include provisions on exclusivity, confidentiality and break-up fees.
Turkey Moroğlu Arseven
Letters of intent and memorandums of understanding The most common preliminary agreements are letters of intent and memorandums of understanding. These cover material issues such as the percentage of share capital to be transferred and the agreed consideration for the transfer. The parties can also choose to set out the procedure to be followed throughout the acquisition process and afterwards.
The term ‘letter of intent’ is commonly used in strategic investment transactions. Terms such as ‘memorandum of understanding’, ‘term sheet’ and ‘non-binding offer letter’ are mostly used in financial investment transactions. These agreements can either be binding or non-binding, depending on the parties’ intentions.
Exclusivity agreements Exclusivity agreements preventing the parties from entering into negotiations with other parties are commonly used in M&A practice. Exclusivity agreements can be made separately or provisions can be included in a letter of intent. Exclusivity agreements usually include a long-stop date, by which negotiations between the parties will continue. Such agreements may foresee that until the long-stop date, the transferor party must not offer shares or other rights in the target to third parties.
Non-disclosure agreements Transaction parties will usually sign a confidentiality agreement when due diligence requests are made and before receiving non-public information from the target. Non-disclosure provisions usually determine the scope of negotiations, as well as stating that information shared with the opposing party during the negotiations is strictly confidential and must not be disclosed to any party or authority without obtaining the other party's written consent.
USA Dechert LLP
Among the most common preliminary agreements are confidentiality agreements and letters of intent.
Confidentiality agreements A confidentiality agreement is usually entered by the parties in the first stages of the negotiations to protect sensitive information that will be exchanged between them in connection with structuring the transaction and conducting due diligence. In the case of a public target, confidentiality agreements often include standstill provisions.
Letters of intent A letter of intent typically contains basic terms pertaining to the proposed transaction and often lays the groundwork for commencing negotiations before drafting the definitive agreements. Generally, a letter of intent contains a number of non-binding clauses (eg, proposed structure of the transaction and process) and a few binding clauses (eg, exclusivity, confidentiality, standstill and dispute resolution).
Letters of intent are generally not used in connection with the acquisition of public companies because of the desire to avoid triggering disclosure requirements.
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