What is a 'Letter of Intent - LOI'
Used in most major business transactions, a letter of intent (LOI) outlines the terms of a deal and serves as an “agreement to agree” between two parties. An LOI is similar to a term sheet in its content, but differs in structure (one formatted as a letter; the other, as a list of terms).
BREAKING DOWN 'Letter of Intent - LOI'
The real utility of a letter of intent is that it formalizes a preliminary agreement on a topic before negotiations get underway, it outlines what can and can't be talked about outside of that negotiation, and it provides a roadmap that describes how things will proceed.
Letters of intent are up for negotiation, as are the contracts themselves. One party may present an LOI, then the other party can counter with edits or a different LOI entirely. Ideally, the end product will protect both parties in their subsequent negotiation and fulfillment of the contract that the LOI posits they will attempt to agree on.
A letter of intent can include provisions that are both binding and non-binding. The ways in which a letter of intent can be binding vary. Some of the least binding LOIs essentially contain a contractual agreement to treat the LOI as non-binding. Some more binding LOIs can include the rules of negotiation of a contract as a binding agreement. Or an LOI can specifically spell out elements of an agreement (for example, a date for deal to be finished, who will write the contract, specifics on financing); these usually include a condition requiring these points to be approved by a board. One of the most binding types of letters of intent, also known as “failed letters of intent,” betray the entire concept of a letter of intent and serve as a contract in their entirety. A letter of intent should bring parties together and help lay out terms as a way to reduce the risk of litigation.
It's not uncommon that letters of intent include non-disclosure agreements, or include ‘no-solicitation’ provisions. A non-disclosure agreement (NDA) is where parties agree what information stays confidential and what information can be shared. In the context of a LOI, an NDA would refer to specific components of the deal. A no-solicitation provision would stipulate that one party can't hire any of the other party's employees.
Other ways in which an LOI can protect both parties negotiating a deal include provisions stating that the deal can only go through if financing has been acquired by one or both parties, or that a deal has to be made by a certain date.
Examples of Use
Common uses of LOI include:
- as a way to clarify which key points of a deal need to be negotiated
- as a method of announcing that two parties are negotiating (say, a joint venture between companies or a merger)
- to protect all parties involved in a deal
In the context of a business deal, the letter of intent is created by the management and legal counsel of a corporation, among others, and outlines the details of the action. For example, letters of intent are used during the merger and acquisitions process to outline a firm's plan to buy/take over another company and will commonly disclose the specific terms of the transaction (whether it is a cash or stock deal, for example).
Letters of intent aren't exclusive to the business world. An LOI can be used to outline the thoughts and hopes parents have regarding their children in the event that the parents die. The courts use the information contained in the letter of intent to determine what happens to the children. Unlike wills, letters of intent are often not legal documents. However, because a letter of intent represents the wishes and desires of the parents, the courts will still often use it as a benchmark in conjunction with other documents to determine what happens to the children.
Letters of intent are also used by those looking for government grants. Letters of intent can help the staff at an agency get an estimate of how much work may be required by a particular project or enterprise.
Letters of intent are also commonly used by colleges recruiting high-school varsity athletes. When a university succeeds in attracting a student with aptitude in both a particular sport and academics to play Division 1 sports at that school, a show is usually made of the student signing his or her letter of intent to attend that college.