This information is not legal advice and is no substitute for
consultation with an attorney in your jurisdiction. The law varies
based on jurisdiction and time. Users are cautioned not to rely on this
Letters of Intent -- Why Business People Love 'Em
and Lawyers Hate 'Em
Letters of Intent ("LOI") , also known as Memoranda of Understanding
and Memoranda of Agreement, are a device used to signal parties'
agreement to the basic structure of serious negotiations to close a
deal. An LOI typically comes into play after a round of initial
discussions and after the signing of a Confidentiality Agreement and a
second round of more serious discussions about the proposed
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A Sample Letter of Intent to Purchase from
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BUSINESS FUNCTIONS OF A LETTER OF INTENT
Commitment to Each Other and to the Deal:
Signing a letter of intent, from a business perspective, indicates that
each party has obtained senior management's approval to work towards
closing the proposed business transaction and that the parties have
moved into a stage of serious negotiations.
Commitment to the Deal for Others to See:
After signing a letter of intent, the parties usually issue a joint
press release announcing the event. This is usually to provoke a
positive reaction in the stock market to the news and some times to
send a message to competitors in the marketplace.
Commitment to a Time Line:
An LOI will set forth a time line for negotiations, including a
deadline for closing the deal and what will occur if the parties fail
to meet the deadline.
Partial Performance and Authorization of Expenditures:
After signing a letter of intent, parties will often begin due
diligence for the transaction and/or preparation of a formal estimate
regarding the transaction. Research and preparation of such documents
involves expenditure of significant funds for the time and materials of
employees designated to perform these tasks. Senior management will
usually authorize spending such funds based on signing the letter of
intent, although rarely will the LOI specify that there is any way to
recoup these funds if the deal does not close.
If not already agreed to in a Confidentiality Agreement, each party
will agree to keep the transaction and information exchanged in
negotiations confidential in an LOI.
LEGAL FUNCTIONS OF A LETTER OF INTENT
AND WRITING A LETTER OF INTENT
of Intent, legally, are the worst of all worlds. Writing a letter of
intent is not to be taken lightly. In law, you either have a contract
or you don't. LOI's are the legal equivalent of "almost pregnant".
Letters of Intent emphatically state that that they are not formal
agreements and then often proceed to set forth agreed terms of the
proposed transaction. Given this paradox, if the deal goes sour, one
party can argue that those agreed-upon points were, in fact, agreed
upon - or, in fact, a binding contract and, in some cases, furthermore,
that the party relied on the LOI and has monetary damages based on such
This is the legal problem with a Letter of
Intent - you can't legally state you agree to something and then state
that you don't in the same document. If the LOI is held to be binding
by a court, you have a contract with general essential terms but
without the many terms you would normally want in final agreements - a
liability limit, warranty waivers, detailed payment and stock terms,
etc. If upheld in court, you have the worst possible contract to work
with - one in which either the court or the parties will have to work
out all the details when the parties are at odds with each other.
If, when drafting an LOI, the author tries
to remedy this ahead of time, by putting as much detail as possible
into the Letter of Intent, so if upheld by a court the important
clauses will be there, then that author risks greatly increased the
odds of a court upholding the document as binding contract because so
many of the essential terms were included.
LOI's are to be used with great caution and,
whenever possible, in conjunction with serious consultation with your
attorney. Nevertheless, they are a reality of the business world.
A LETTER OF INTENT GONE BAD
long ago, in very early 1984, Getty Oil and Pennzoil signed a
"Memorandum of Agreement" for a complex investment and stock
transaction whereby Pennzoil would purchase Getty Oil stock. The
Memorandum set forth general terms of the investment that had been
reached in conversations and that the Memorandum was subject to the
approval of the Board of Getty Oil. The Memorandum was to expire if not
approved at the January 2 meeting of the Board and was signed by
persons who made up the majority shareholders of Getty Oil.
After some negotiations between Pennzoil and the Board of
Getty Oil during that Board meeting which ran for several days, the
Board approved the transaction. On January 4, 1984, both parties issued
press releases with "agreement in principle" to the terms of the
On January 4, Getty Oil and Texaco began
discussions for Texaco's purchase of Getty Oil, while at the same time
the officers of Getty Oil and Pennzoil ratifies the agreed-upon terms
of the Memorandum and the lawyers for each began preparation of final
On January 5, the Board of Getty Oil
accepted a better stock offer from Texaco and voted to withdraw its
negotiated counter-offer to Pennzoil which had been announced as agreed
in principle with Pennzoil.
On January 6, Texaco issued a press release
that Getty Oil and Texaco would merge. Pennzoil protested and Getty Oil
filed suit for a declaratory judgment that it was not bound by any
contract with Pennzoil. The final agreements for the merging of Texaco
and Getty Oil were signed on January 6 - 8.
There, of course, is a long legal opinion
about this case which focuses on the intent of the parties as
determined by their acts and communications. The court scrutinized not
only the Memorandum, but also the wording of the press releases and
In the end, Getty Oil was found to be in
breach of the Memorandum of Agreement - the document the parties had
viewed as a letter of intent. At what point in the story did it change
from a letter of intent to a final agreement? Very hard to tell.
Pennzoil ended up with $10.6 billion (later settled for $3 billion) from Texaco for interfering in its deal with Getty Oil.
are cautioned not to rely on this article as legal advice as it is no
substitution for a consultation with an attorney in your jurisdiction.
Based on jurisdiction and time, the law varies and changes.
©2016 Coollawyer Inc. All rights reserved.
Moral of the story - watch out if you're using or writing Letters of
Intent - be cautious, don't let your press releases (and mouth) get
ahead of the deal, and consult your attorney. Letter of intent samples
and letter of intent examples from particular deals can be found on the
web. Letter of Intent Free Examples, letter of intent examples, Sample
Documents Letter of Intent, Writing A Letter of Intent Form, sample
employement letter of intent and Format For Letter Of Intent For
Employment, and more are available on the web, but you are taking risk,
so read on below before using them. A Sample Letter of Intent to
Purchase from the author is available here.