Requesting Letter of Intent or Memorandum of Understanding

Requesting Letter of Intent or Memorandum of Understanding

One or both parties may request that their preliminary understandings be embodied in a letter of intent or memorandum of understanding. The wisdom of entering into such an agreement at an early stage of negotiations when the terms of the transaction are preliminary in nature is debatable. Some commentators believe that entering into a letter of intent or memorandum of understanding indicates good faith. Others maintain that a letter of intent or memorandum of understanding is practically useless as they are almost always non-binding because neither party has begun to conduct its due diligence investigations of the other party.

Warning: 
Regardless of whether the parties use a letter of intent or memorandum of understanding, it is vitally important for the parties to have a preliminary understanding with respect to any break-up fee involved if one party or the other chooses to back out of the transaction. The events that will trigger the break-up fee could include voluntary acts such as the target's electing to be acquired by another suitor or the target's choosing to forgo the transaction in favor of a public offering or substantial private financing.

Strategic Point: 
If the parties' intent is that the letter of intent be non-binding, clearly state in the letter that the transaction is subject to execution and delivery of definitive transaction documents and that (except as set forth in paragraphs __________, __________, and ___________) there is no contractual obligation binding upon the parties until the definitive agreements are signed. Note that a letter of intent that is non-binding may give rise to an obligation to negotiate the definitive agreements in good faith.