Letter of Intent
A preliminary written document outlining the proposed terms of a transaction, purchase price, structure, key conditions, exclusivity, timeline, before parties negotiate definitive agreements. Typically the first formal step after parties identify a deal.
A letter of intent (LOI), sometimes called a "term sheet" or "memorandum of understanding," is a preliminary written document outlining the proposed terms of a transaction, purchase price, structure, key conditions, exclusivity, and timeline, before the parties negotiate definitive agreements. LOIs are the conventional first formal step after parties identify a deal worth pursuing.
Hybrid binding/non-binding structure
Most M&A LOIs are deliberately structured as partly binding and partly non-binding. Typically binding: confidentiality, exclusivity / no-shop, expense allocation, governing law, and dispute resolution. Typically non-binding: purchase price, structure, indemnification, closing conditions, and other commercial terms. LOIs commonly state expressly which provisions are binding and which are not.
Texas enforceability
Texas courts enforce binding LOI provisions like any other contract. The principal risk for parties seeking non-binding effect is that a fact finder concludes the parties intended to be bound before signing a definitive agreement. Whether a contemplated formal document is a condition to forming a contract or only a memorial of one already made is often a question of fact, and "subject to legal documentation" language does not settle it as a matter of law. Foreca, S.A. v. GRD Dev. Co., 758 S.W.2d 744 (Tex. 1988). Clear "non-binding except as expressly stated" language is the usual drafting response.
Exclusivity / no-shop
The most consequential binding provision in most LOIs. A typical no-shop binds the seller for 30–90 days from LOI execution, prohibiting the seller from soliciting, negotiating with, or providing diligence to other potential buyers during the period. Buyers rely on no-shops to justify investment in due diligence and definitive-document negotiation.
The LOI sets the negotiating frame for the entire transaction. Items left vague in the LOI are often renegotiated in the definitive agreement, after the buyer has completed diligence and while the seller is bound by exclusivity. Sellers generally gain from settling commercial terms in the LOI, and buyers generally gain from keeping flexibility.