In the initial phase of a company acquisition, a Letter of Intent (LOI) or Memorandum of Understanding (MOU) is often used. These are similar documents in which the purchaser and seller state their intention to come to a deal and in which they outline what the deal will look like.
In a ‘pure’ LOI, only procedural agreements are laid down with regard to a potential deal. The LOI then includes the steps to be taken in the takeover process, the provision of information, the conclusion of a non-disclosure agreement (NDA) and whether or not exclusivity exists between the potential purchaser and seller. The LOI therefore describes the way in which and conditions under which the purchaser and seller will negotiate a possible acquisition. The actual conditions of the sale and purchase still need to be laid down in a separate document, a Share Purchase Agreements (SPA) or Asset Purchase Agreements (APA).
With an LOI, in certain cases, a legal commitment can already be established whereby a potential buyer or seller is no longer free to renounce the acquisition. This may be the case when the LOI states that a company will be bought or sold at a certain price. It is therefore important not to simply draw up or sign an LOI on the assumption that it merely expresses the intention to negotiate with each other.