A letter of intent is a preliminary document, generally prepared by an attorney, that memorializes in writing some or all of the key deal points that negotiating parties have agreed upon. Often pitched as "non-legal binding", parties will sign such a document, feeling that they have little or nothing to lose by doing so. This article will discuss the benefits and risks to consider when determining whether to use a letter of intent for your next million dollar deal.

Why Use a Letter of Intent.
1. Commitment to preparation of an agreement.
More often as practical matter, there is a substantial delay between the time the parties reach a verbal agreement and the time when the verbal agreement is committed to a signed written agreement. A delay can breed miscommunication and encourages endless renegotiation of terms. Committing the key terms to writing in the interim provides clarity of agreed upon terms and encourages completion of the transaction.

2. Exclusivity in negotiations.
While the drafting of the final agreement is pending, a letter of intent is useful to commit the parties to mutually exclusive dealings on the transaction. Exclusivity in dealings avoids either party from suffering from a feeling of insecurity, wondering whether the other party will reject the deal to pursue other opportunities or search for a more attractive deal while final drafting is pending.

3. Information sharing.
A letter of intent can also address potential vulnerability and exposure of confidential information exchanged during the course of negotiations. The inclusion of a "Confidentiality and Non-Disclosure" provision protects the parties and encourages an open exchange of information.

4. Clarity for third parties.
A letter of intent can provide the necessary information to provide to third parties to demonstrate the pending transaction. It allows the parties to obtain approval from boards of directors, loan committees, junior lien holders etc. It is also useful when financing is required prior to the consummation of the transaction.

Risks of Using a Letter of Intent
1. Contractual obligation.
One of the attractive elements of a letter of intent is its purported non-binding nature. However, courts can and will enforce letters of intent if (1) they are convinced that the parties intended to be bound by the agreement and (2) the agreement is sufficiently definite to be enforced. Therefore, to assist and minimize judicial interpretation, the parties should explicitly state the binding or non-binding intent of the letter. Careful drafting is critical and failure to be specific in the binding or non-binding nature can dramatically increase the parties litigation risk.

2. Rigidity.
The letter of intent may limit the flexibility of the parties' positions and negatively impact the negotiation process. A party seeking to renegotiate term will be at a disadvantage once these points are incorporated into a letter of intent, even if supposedly "non-binding."

3. Bad faith liability.
Some letters of intent includes a provision that requires the parties to negotiate unresolved terms in good faith. In such instances, some courts have found that this duty to negotiate unresolved terms in good faith may impose liability on parties who are deemed to have acted in bad faith or who refused to negotiate in good faith.

4. Risk of disclosure of trade secrets and confidential information
Even with confidentiality provisions, the risk is present that a party and/or its representatives may make improper disclosures of confidential information or trade secrets. It is also possible that if the transaction is not consummated, the disclosed confidential information may be used to compete against the exposed party.


Conclusion
A letter of intent certainly has its place in today's business. In fact, it can be extremely useful at times. The important thing is to understand what its legal significance is and whether you are, or are not, bound by execution of it. It is important to have your attorney review the document carefully, explain its contents and advise whether you should or should not execute such a document.
















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