LOI (letter of intent)

LOI (Letter Of Intent)

One of the first documents on the table after signing an NDA is usually a kind of preliminary agreement in preparation for a definitive agreement. In technical jargon, these are also referred to as “term sheets” or “heads of agreement”. The name itself is less important. What is important is to clearly stipulate the extent to which these preliminary agreements are legally binding for the parties. In principle, they will contain the rules of the game on how the parties will now further explore the case. Depending on the situation, a preliminary agreement will be more or less binding. There is a sense of interest on both sides and an attempt is made to legally define the first parameters of a deal.

This interest is usually expressed in a “Letter of Intent” (LOI). This is a unilateral confirmation by a prospective buyer or acquirer of his interest, indicating a number of parameters of the hoped-for transaction. He makes his intentions clear but confirms that there is no agreement yet. So an LOI is rarely binding, except for certain clauses. But it is and remains important to always look carefully at the text of such letter of intent, because it can range from a non-binding letter of intent to sometimes even a proposal or offer.

Lawyers are not always present at this stage, but we recommend (especially for clients with little experience) that you consult a lawyer at this stage. Parties often think they are engaging in informal discussions, but by signing certain pre-agreements they enter the contractual sphere with all its consequences, as a result of which a breach of it can effectively lead to contractual liability.

At this stage, in addition to certain preliminary agreements, additional clauses are often agreed upon now that the exploration phase is over and costs need to be incurred by the parties. Think for example of lawyers, financial advisers, carrying out a due diligence investigation, etc. Frequently occurring clauses are:

Exclusivity clauses: clauses whereby parties agree to negotiate exclusively with each other for an agreed period. The seller is obliged to negotiate only with the respective buyer during a certain period of time and not to search or negotiate with other potential buyers. Whether the seller agrees to this depends on each case.

Break fee: a contractual fee agreed in advance if the negotiations are terminated in a discretionary manner by one of the parties at a given moment. In other words, if one of the parties simply

pulls the plug.

Non-solicitation/non-competition clauses: contractual obligation of the seller not to compete and not to recruit clients/staff. With the asset deal, we do not really need such a clause since articles 1625 and 1626 of the Civil Code impose an obligation on the seller to indemnify against foreclosure.

In a share deal, however, a non-compete clause is necessary because articles 1625 and 1626 of the Civil Code apply only to the shares and not to the underlying assets. But the Decree d’Allarde that puts the freedom of trade and enterprise first, and which is now externalised in Book II of the Economic Code, Title 3 (Freedom of enterprise), only allows for a limited application of a non-compete clause. According to case law, a non-compete clause must be reasonable and proportionate. Three criteria are taken into account:

  • a duration of three to a maximum of five years;
  • the territory must be the same as the territory in which the company has its activities at the time of the acquisition; 
  • the activity must be identical to the activity that the company has at the time of the transfer.

It is important to note that such a non-compete clause is not limited to the seller alone, but also applies, to the extent possible, to persons closely associated with the company such as the manager, directors, affiliated companies within a group, etc.

Often, a fixed amount is provided per infringement and per day that is sufficiently high so that it acts as a deterrent, because it is very difficult in practice to prove the extent of your loss in the event of an infringement.

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