The letter of intent explained
The other day an esteemed client contacted us, asking if we could review a draft letter of intent. His company (X BV) and Y BV had the intention to merge. Prior to the merger, the parties would first focus on a collaboration and if that was working out well, they intended to merge. The client had written this down thinking it had no legal effect because it was “only” a letter of intent. We were glad he called us….
In merger and acquisition process parties often start with a letter of intent (intentieverklaring) or agreement of intent (intentieovereenkomst). These terms are often used interchangeably. In principle, a letter of intent is unilateral. A party declares to the other party that he has the intention to do or not to do something. No mutual agreements are made. With an agreement of intent, however, parties do enter into an agreement as the parties mutually express their intention to (not) do something and make explicit agreements around it. In practice, however, it is not black or white. A document may be called a letter of intent, but when such document (also) contains certain commitments between the parties, it is a real agreement. The parties can then hold each other to the obligations resulting from these agreements. This is often misunderstood in practice; the cause of many disputes.
An example from practice
X BV wanted the letter of intent to include agreements on the cooperation, the merger date and the financial aspects. However, the draft letter of intent contained no reservations and no arrangements about what happens if the cooperation does not go well. Because of the wording of the draft letter of intent X BV would be making a considerable commitment. What if, at the end of the cooperation period Y BV thinks that the cooperation went well but X BV thinks otherwise? X BV would then find out that the letter of intent was a full agreement, however, without the necessary safeguards. That would be very problematic. Fortunately, it did not come to that. We have provided our client with al legally top-notch letter of intent.
In short, an agreement is an agreement, regardless of the title of the document. If the letter of intent contains commitments between the parties involved, the parties are bound by those commitments. If that is not the intention, then the parties should make that very clear. At least, that should be their intention….
Would you like to have more information about the letter of intent? Then please contact us. We’re happy to assist you.