The Letter of Intent and

Other Preliminary Matters

1. Introduction
2. Advantage and disadvantages of executing LOI
3. Types of LOI (binding, nonbinding, hybrid)
4. Proposed terms
5. Binding terms
6. Common reasons why deals die at an early stage
7. Preparation of the work schedule
8. The growing debate about the rules and usefulness of fairness
opinions
1. Introduction
This stage starts after the seller and the buyer have developed a strategic plan
and tentative time table to complete the deal, so it is after “get to know each
other”. Buyer may be supported by advisors to ensure it is a transaction that
matches with buyer’s goals.
some courts have interpreted such documents (LOI) as being binding legal,
(even if one or more of the parties did not initially intend to be bound)

2. Advantage and disadvantages of executing LOI page.72

a. Advantages
i) Test parties’ seriousness and mentally commits to the sales and discourage
the seller from shopping around.
ii) Highlight the remaining open issues and valuation gaps that needs further
negotiation.
iii) One of most important advantages, signing LOI give the investment banker
the opportunity to be more aggressive in negotiating the price with other
interested buyers. Accordingly, investment banker may manage an auction.
b. Disadvantages
iv) It may be enforceable agreement (binding)
v) Public announcement may be required (if any of parties are publicly held)

3. Types of LOI (binding, nonbinding, hybrid)

a. Binding
b. Non-binding
 c. Hybrids: it is the most commonly used format, but both parties
should be clear whether thy consider LOI as agreement in
principal (binding preliminary contract) or just a memorandum
LOI, should provide an overview for matters that require further discussion such as the
price (price usually stated after the Due Diligence). But LOI will typically incorporate a
price range that is qualified by a clause or provision setting forth all of the factors that
will influence and affect the calculation of a final fixed price, such as balance sheet
adjustments, due diligence surprises or problems, a change in the health of the
company, or overall market conditions during the transaction period, and sometimes
even an “upside surprise” in favor of the seller when a significant positive development
occurs during the transaction period
4. Proposed terms
Section 1: states principal terms of the agreement which is not
binding to any party unless a definitive stock purchase agreement
(SPA) is signed. Such section may include:
a. No. of shares, minimum price, price range, name of sellers
b. Employment agreement: states key employees required to
continue after closing and their compensation
c. Closing and documentation: maximum closing date, during
this period the buyer will prepare draft of required agreements
Section 2(Binding terms): contains a number of covenants by the Parties,
which shall be legally binding upon the execution of this Letter Agreement by the
Parties. Such may include: page. 78
a. Refundable deposit: is a deposited amount by the buyer and will be deductible
from purchase value, but incase failure of acquisition, the seller will refund such
amount (and may deduct a value of expenses paid by seller for the transaction)
b. Due diligence: undertaking by the seller and its directors to give access to the
buyer and his representatives to all required data whether financial, legal…etc.
c. No material changes: it describes seller’s responsibility to conduct the company
normally (without a material changes) and advise the buyer with any abnormal
material transaction.
d. No-shop provision (standstill provision): this is an advantage of binding
agreement, as the seller will be entitled for exclusivity during a specific period
e. Lock-up provision: by this condition, the company agrees that from execution (
‫ )التوقيع‬of this agreement until whether completion of the transaction or failure
and refund of all advance payments  no issuance of new common stocks or
pledge of it or selling of it ( unless upon a written approval by the buyer)
f. Confidentiality: Prior to Closing, neither Party nor any of their Representatives
shall make any public statement or issue any press releases regarding the
 agreements, the proposed transactions described herein or this Agreement
without the prior written consent of the other Party. Unless it is required by law
a. Expenses; finder’s fees: finder’s fees are the commission of the intermediary;
this condition will stipulate that each will pay party’s expenses up to a limit, and
any addition will be paid by the buyer
b. Breakup fee (walkaway fees): the fees that are payable by the seller if decided
not to sell according to agree upon terms and conditions which was signed by
both.
c. Effective date:

Binding Terms
Binding terms will not to further negotiation any more. That includes:
a. Legal ability of the seller to consummate the transaction
b. Protection of confidential information
c. Access to books and records
d. Breakup or walkaway fees
e. No shop (standstill) provision
f. Good-faith deposit—refundable versus nonrefundable
g. Impact on employees
h. Key terms for the definitive documents
i. Conditions to closing: Both parties will want to articulate a set of conditions or
circumstances such that they will not be bound to proceed with the transaction if
certain contingencies are not met or if certain events happen after the execution
of the letter of intent
j. Conduct the business prior to closing:
k. Expenses / brokers: The parties should identify, where applicable, who shall
bear responsibility for investment bankers’ fees, finders’ fees, legal expenses,
and other costs pertaining to the transaction.
a.
5. Common reasons why deals die at an early stage
a. The seller has not prepared adequate financial statements
(e.g.,going back at least two years and reflecting the company’s
current condition).
b. The seller and its team are uncooperative during the due
diligence process. Or The seller is inflexible on price and
valuation when the buyer and its team discover problems during
due diligence. Or the seller didn’t consider well the value after
due diligence facts such as tax adjustment
c. The seller suffers from “don’t call my baby ugly” and becomes
defensive when the buyer and its team find flaws (and then focus
on them in the negotiation) in the operations of the business, the
 valuation, the loyalty of the customers, the quality of the accounts
receivable, the skills of the personnel, and so on.
d. The buyer and its team discover a “deal breaker” in the course of
the due diligence (e.g., large unknown or hidden actual or
contingent liabilities).
e. A strategic shift (or extenuating set of circumstances) affecting
the acquisition strategy or criteria of the buyer occurs (e.g., a
change in the buyer’s management team during the due diligence
process).

6. Preparation of the work schedule

Following the execution of the letter of intent, one of the first
responsibilities of the purchaser’s legal counsel is to prepare a
comprehensive schedule of activities (work schedule) that will serve as a
task checklist and assignment of responsibilities. This schedule should be
prepared well before the due diligence The
primary purpose of the schedule is to outline all of the events that must
occur and the documents that must be prepared prior to the closing date
and beyond. In this regard, purchaser’s legal counsel acts as an orchestra
leader,
7. The growing debate about the rules and usefulness of fairness
opinions
The buyer want to proof to shareholders that they didn’t abuse
shareholders’ money in the transaction, meanwhile the seller
wants to proof that he got the fair price.
So it became crucial to ensure that:
 the author of the fairness opinion is truly independent
 the author of the fairness opinion is not just “telling the directors what
they want to hear
 success fees as a component of the compensation paid to the author of
the opinion have been removed
 second and third opinions to the core fairness opinion have been
obtained