Letter of intent in purchase and sale operations

Letter of intent or Letter of intent in business purchase and sale operations

The letter of intent in sales operations constitutes the embodiment on paper of a will to buy by the interested buyer, and a will to sell by the owner of the company in question.

This is a first document signed by the parties when they are preparing to undertake a negotiation period, before having agreed on the essential elements of the operation.

Sometimes the letter of intent can be unilateral, translating as a will expressed by the interested buyer towards the alleged seller, with the aim of starting purchase negotiations.

In practice they are better known by their English terminology – letter of intent – since they originate from the international contracting, which little by little have been used more frequently in Spain.

Its name avoids the use of the word “contract”, however we already know that the name of an agreement does not affect its content, so it will have to be Be careful when writing the letter of intent to avoid commitments that you do not want to acquire at such an early stage of the negotiation.

Contents of the letter of intent

There is no general content or minimum requirements for the text to be considered a letter of intent, but there are certain aspects that are commonly repeated in this type of documents. We cite some of them:

Activities to perform (Scope of action)

The parties usually outline those activities that they agree to carry out to advance the course of the negotiations. Normally it is about the delivery of documentation and other previous actions that are convenient considering the specific case.

Schedule

Negotiators can agree on a schedule of action in order to meet negotiation stages and advance at the desired speed.

Confidentiality

Usually a confidentiality section is included, according to which the commitment is established not to disseminate the information that both parties are going to share in the negotiations.

Exclusivity

Sometimes an exclusivity regime is imported, so that the seller and buyer cannot receive or issue offers with third parties, nor undertake parallel negotiations with other entities.

Representation (Representation)

When there are several participants in the buying party or in the selling party, it is convenient to determine the people who assume the role of representation on behalf of each party.

Card duration (Duration)

The parties agree on a term of validity for the content of the letter of intent.

Consequences of signing a letter of intent in sales operations

A properly drafted letter of intent should not bind the parties to a final agreement. Both parties maintain the freedom to withdraw from the negotiations without this decision producing responsibilities towards the other negotiator.

These are documents that do not include the essential elements of the contract (according to legal praxis these would be: identification of the parties, true purpose and lawful cause ), so that it is not considered a contract in itself or an agreement capable of generating effects on the object of transfer.

Usually in the letter of intent it is indicated that the document does not imply the existence of any agreement and it is stated that it does not imply an obligation to finish the negotiations successfully.

However, we must note that on occasions the courts have cleared relevant responsibilities derived from a letter of intent when they have appreciated that there were essential elements of a contract, or when it was interpreted that way in view of the behavior of the parties.

Regulation of the letter of intent

The article 1,255 of the Civil Code prevents that “the contracting parties may establish the agreements, clauses and conditions that they deem convenient, as long as they are not contrary laws, morality, or public order”.

Actually, the letter of intent is not regulated as such in our Legal System, and has been defined by the Supreme Court – albeit in an imprecise way – as a mere invitation to hire, which requires a subsequent agreement to generate effects.

Is it advisable to sign a letter of intent in a business sale transaction?

Signing a letter of intent is not an essential requirement to close a commercial operation, nor does it guarantee a greater chance of success. It is not common in small-scale operations, but it is advisable in complex or economically relevant operations for several reasons:

Better organization of the operation

The parties include in the document actions to be undertaken. It is not a binding commitment, but it can also be used to organize the tasks of each one.

Faster processing time

Establishing a calendar of actions helps to shorten deadlines and obtain the desired end in less time.

Pledge of confidentiality

When documentation is to be transferred, which is common in company purchase and sale operations, a confidentiality commitment is achieved with respect to the party receiving the documentation. Generally, it is the selling company that shows information that may be confidential.

Exclusive Commitment

It is not usual for the parties to agree to grant exclusive rights to negotiations. In the event that it is agreed, the letter of intent that contemplates it thus becomes more important.

Differences with contracts and other pre-contractual figures

The letter of intent is conceived as a pre-contractual figure for the mere fact of being prior to the final contract.

There is some terminological confusion between the different pre-contractual figures, because there are several names used in practice, which do not always have a clear or evident distinction between them (pre-contracts , letters of intent, memoranda of understanding, head of terms, preliminary contract, etc.).

Precisely the lack of regulation in this regard is what generates the coexistence of such broad terminology.

Some argue that the letter of intent is a unilateral document, in which one party invites another to start negotiations. Thus distinguishing it from the memoranda of understanding in which the willingness of both parties to start the negotiation process is reflected. The truth is that the Supreme Court does not offer a technical distinction between them.

Beyond the terminological debate, what is truly relevant are the consequences that may derive from it. The letter of intent is not an offer subject to acceptance, but a document that contains a mere intention (whether unilateral or bilateral). As long as the fundamental elements of a contract are not established, that it does not constitute a firm offer to buy or sell, and that requires a subsequent agreement, we will speak of the non-binding letter of intent and not of a firm contract.