A Closer Look at the Letter of Intent

While it is well established that the legal framework governing negotiations rests on a legal principle — that of freedom of contract — parties in discussions, especially in the context of complex contracts or matters of significant stakes, very often feel the need to secure their negotiations or ensure their effectiveness.

A "Letter of Intent" (LOI) – not to be confused with the guarantee of the same name commonly used in banking practice – is a document declaring one party's preliminary commitment to do business with another. The letter describes the main terms of a potential agreement. It is frequently used in contractual negotiations, particularly in company sale transactions, or when taking an equity stake as part of a venture capital or growth capital transaction.

By framing the negotiations, the letter of intent allows each party to express its willingness to participate in the proposed sale while reserving the right not to conclude the sale agreement once negotiations have ended.

Its main purpose is to confirm or formalize the seriousness of an intention to complete the transaction and/or to set out, in principle, the intended acquisition or sale.

The letter of intent may be unilateral, issued by the acquirer for the benefit of the transferee, who may accept it by separate correspondence, or bilateral, with the transferee countersigning the letter and returning a copy to the issuing acquirer.

In principle, the letter of intent is not binding. However, it may be reclassified when it contains a firm and definitive agreement between the parties on the subject matter and the price.

The content of the letter of intent varies considerably, but it generally includes clauses relating to the subject of the negotiations; the financial terms and conditions of the transaction; confidentiality; a reminder of good faith obligations; the allocation of costs incurred during the process; and an exclusivity clause preventing the seller from entering into negotiations with another potential buyer.

The form of the letter of intent is not subject to any particular rule. It most often takes the form of a private letter, which must be sent to the contracting parties by registered mail with acknowledgment of receipt.

The letter of intent is a particularly important legal instrument during negotiations; its drafting is delicate and must be carried out conscientiously.