A Letter of Intent (LOI) is a document, written in the form of a letter or declaration, whereby its author informs the addressee of his genuine intention to enter into or continue negotiations with him. The LOI therefore formalises a willingness to enter into talks (within the meaning of Art. 1112 of the French Civil Code) and aims to establish a relationship of trust and professionalism between the parties (generally the seller and the buyer). Above all, this document makes it possible to sketch out the contours of the future transaction, without obliging the parties to actually sign it. As we shall see, the LOI has many virtues (I), provided it is used wisely (II).
I. Why sign a letter of intent
Under French law, negotiations (or pourparlers) are naturally very lightly regulated. Contractual freedom implies that any capable person is free to enter into a contract or not. In other words, we are free to negotiate private agreements as we see fit. The only limit to this freedom is the one that governs all private relationships: “contracts must be negotiated […] in good faith“, (free translation of Art. 1104 of the French Civil Code). That said, in practice, the more decisive a contract is (financial stakes, legal technicalities, deadlines and conditions precedent, etc.), the more useful it is to organise the negociations leading to its conclusion.
1.1. The LOI facilitates the negociations, as it expresses a serious intention to conclude the contract
One of the main advantages of this document is that it demonstrates a genuine intention to enter into the contemplated contract. Surrounding yourself with professionals and describing the outlines of the planned transaction is usually very appreciated. It demonstrates a meticulous approach that can be very reassuring. When there are several potential buyers in competition with one another, this can even make all the difference (exclusivity being granted to the one who has prepared the LOI).
This is a great way of speeding things up, as the parties can express their agreement in principle on key aspects of the transaction. This of course concerns the subject matter of the transaction: what assets are actually involved? It may also involve projected timescales (e.g. for concluding a sales agreement, for fulfilling or waiving a condition precedent, for reiterating the sale, etc.), or a rational allocation of costs and formalities between the parties. The price, or at least a range or method of calculation, is of course adressed. Certain elements to be determined at a later date can also be anticipated (an audit, diagnosis, communication of documents, etc.).
Let’s remember that the parties have a great deal of freedom at this stage. There are no formal requirements.
For the most complex projects, letters of intent can become very detailed. There are three advantages to being exhaustive:
- Ensure that each party is fully aware of the obligations they are about to enter into;
- Draw up a kind of map, which the drafters of the deed will follow to enshrine the parties’ agreement; and
- Maximise the chances of the deal going through, while reducing the risk of disputes (imprecision being the most fertile ground for litigation).
However detailed it may be, the LOI is not binding. Ultimately, each party remains free to conclude or not to conclude. A letter of intent is therefore radically different from a firm offer, which “made to a specified or unspecified person, includes the essential elements of the envisaged contract and expresses the intention of its author to be bound in the event of acceptance […]” (free translation of Art. 1114 of the French Civil Code). As we shall see, this distinction deserves to be clearly recalled in the text of the LOI.
The key words here are: precision, efficiency, safety and flexibility.
1.2. The LOI imposes some obligations on the parties
Although, the LOI is not binding as regards the conclusion of the contract or compliance with future clauses, certain aspects can be made binding.
The first exception to the non-binding character concerns the exclusivity of negotiations. The idea here is to guarantee that, for a certain period, only the signatory parties are allowed to negotiate this transaction. This allows them to incur costs (accountants, lawyers, etc.) with complete peace of mind, without worrying about third parties. Reciprocally, they are encouraged to advance their discussions as efficiently as possible and conclude the relevant deed before the end of this period. In practical terms, the exclusivity translates into an obligation not to negotiate with third parties until the period has expired. In the event of a breach, remedies exist, whether or not they are expressly provided for in the letter (e.g. damages).
The second exception concerns the confidentiality of information. Given the sensitive nature of the data and documents exchanged, it is in the interests of the parties to ensure that they are not disclosed to third parties. It is only once this confidentiality has been protected that information can be shared transparently.
Let us indeed remember that “the party who knows information whose importance is decisive for the other party’s consent [must] inform the latter if it is legitimately unaware of such information or has confidence in its counterpart” (free translation of Art. 1112-1 of the Civil Code). The parties may even impose the use of a specific process (secure data room, encrypted e-mail, non-preservation, etc.). Here again, breach of this obligation may be sanctioned by the courts (judicial, commercial or arbitration tribunal, as the case may be).
Finally, the signing of an LOI discourages the parties from abruptly breaking off negotiations. By “abruptly”, we mean without valid reason, in bad faith, in a vexatious manner, etc. Abusive termination of talks (rupture abusive des pourparlers) is a well-known cause of liability in French tort law. Obviously, it will be more easily established in the presence of an LOI, the very purpose of which is to ensure that the negociations are properly conducted.
II. How to write a letter of intent
Only a well-drafted letter of intent will enable its author to benefit from the advantages described above. Without being exhaustive, here is some pragmatic advice on the subject.
2.1. The LOI must be an invitation to tender, not a firm a offer
With a few exceptions (exclusivity, confidentiality, etc.), the letter of intent should not be binding. It should not be susceptible to give rise to a contract per se. Its wording is thus fundamental. Irrespective of the subjective will of the drafter, poor drafting could lead to a reclassification (as a firm offer, for example). We still see many letters of intent drafted as offers (even for very expensive property transactions…). This is quite tragic for, once accepted, a contract is formed. And where there is a contract, there is the possibility of forced enforcement. Far from being a theoretical hypothesis, our courts frequently have to deal with this type of dispute.
Let us not forget that judges “must give or restore their exact characterisation to the facts and acts in dispute regardless of the characterisation proposed by the parties […]” (free translation of Art. 12, paras. 2 & 3 of the French Code of Civil Procedure).
Yet, this risk can easily be avoided. A simple explanatory paragraph may even suffice:
This letter of intent is only an invitation to tender (within the meaning of Article 1112 of the French Code civil). It therefore cannot be considered as a firm offer (governed by articles 1114 et seq. of the same Code). With the exception of its articles (confidentiality & exclusivity), it therefore does not entail any charge, obligation nor binding commitment. whatsoever.Drafting example
Naturally, the rest of the document should be written coherently. This often includes the use of the conditional tense:
Below are some of the elements that I would like to see included in the reciprocal promise to sell and purchase (hereinafter “the Compromis”) that we could eventually conclude.Drafting example
The aim of the LOI is of course to facilitate the conclusion of a contract, the content and scope of which are yet to be defined, should the parties reach a favourable outcome, at the end of their negotiations; under no circumstances should the parties find themselves bound hand (pieds et poings liés).
2.1. The LOI must be precise and tailored to the contemplated transaction
The letter of intent must be precise. As this is generally the first document signed by the parties, the purpose and terms of the negotiations must be precisely defined. A letter of intent that is imprecise, fanciful or unrealistic will not facilitate negotiations – quite the contrary! The author should therefore pay particular attention inter alia to the following points:
- What is the subject matter (objet) of the future contract? Company shares: which ones? An on-going business (fonds de commerce): what are the tangible and intangible elements? Real estate: which lots? Which cadastral sections?
- Who will be the parties to the transaction? Natural persons or legal entities? Companies already set up or to be set up before the transaction? Before or after restructuring?
- What price are we talking about? A fixed price or a price to be determined? How is it calculated and up to what amount? Fixed or variable? Perfectly known or subject to inventory?
- What conditions precedent are foreseeable? Financing: obtaining a loan or the participation of an investor? Concerning the property itself: additional audits or diagnostics? Relating to third parties: waiver of a right of pre-emption or prior approval?
There are so many different topics, it would obviously be impossible to draw up an exhaustive list.
We would also urge you to take into account the particularities of the economic sector. It may seem obvious, but you don’t negotiate the purchase of a Bordeaux wine estate in the same way as an investment in an American company; the sale of an oyster farm in Charente-Maritime in the same way as an Irish pub in Paris. The psychological and subjective aspects must be taken into account. A letter of intent that is perfect in substance may be totally irrelevant in form.
General conclusions on the letter of intent
What conclusions can we draw from all this?
Firstly, the LOI should be considered whenever a technical, substantial or difficult negotiation is about to take place. Secondly, this document, although flexible and pragmatic, must be carefully drafted by, or in close collaboration with, your advisers. The drafting stage will also be an opportune time to bring together the various professionals working with you (chartered accountant, lawyer, notary, bank advisor, etc.).
For more information about writing a letter of intent, please contact our team directly.