Letters of intent (LOIs), term sheets, memoranda of understanding—any of these largely interchangeable documents can come into play when an early stage enterprise seeks capital to fund its growth or pursues other commercial transactions. Typically, these documents will be "non-binding" (meaning that their terms will not be legally enforceable by the parties and are merely expressions of the parties' preliminary intent), but they can and often do include certain provisions that are expressly identified as legally binding on the parties, such as confidentiality and exclusivity provisions. All other provisions, including the business terms of the transaction and whether the transaction even occurs, are typically identified as non-binding.
While the concepts of binding and non-binding seem clear, the reality is that LOIs, especially when supplemented with definitive transaction documents, may contain ambiguities that can lead to disputes or even litigation over exactly which provisions are binding and non-binding. For example, in the Delaware Supreme Court case EV3 Inc. v. Lesh, a dispute arose between two parties who signed a non-binding LOI relating to the merger of one party into another. The final merger agreement signed by the parties provided for the bulk of the consideration payable to shareholders of the target company (Appriva Medical, Inc.) to be contingent upon the timely accomplishment of specified milestones relating to the approval and marketability of a medical device being developed by Appriva. When those milestones were not reached and the contingent payments to the shareholders of Appriva were not made by ev3, Inc., the Appriva shareholders sued ev3 claiming that it had breached a provision of the LOI which stated that ev3 "will commit to funding based on the projections prepared by its management to ensure that there is sufficient capital to achieve the performance milestones." While this provision was in the non-binding LOI, it did not find its way into the final merger agreement. Instead, the merger agreement provided that ev3 would fund and pursue the regulatory milestones in its "sole discretion, to be exercised in good faith."
The Delaware Supreme Court held that, notwithstanding an "integration clause" in the merger agreement providing that the LOI was not to be superseded by the merger agreement, only the binding provisions of the LOI (confidentiality, exclusivity, etc.) could be enforced. The Court reasoned that a conclusion finding that the non-binding provisions of the LOI somehow became binding because the LOI was not wholly superseded by the definitive terms of the merger agreement "would set a precedent that would undermine parties' ability to negotiate and shape commercial agreements."
Your lawyer can help you craft the appropriate language, but here is a sample of unambiguous language that should appear in an LOI:
"Except with regard to the provisions addressing "Confidentiality", "Exclusivity" and this final paragraph, which will each be binding upon the parties and enforceable in accordance with the terms set forth herein, the provisions of this LOI are not intended to be a binding or enforceable agreement and the parties contemplate that they will become legally bound only if, as and when the transaction documents are executed and delivered by the parties."
Originally published October 17, 2014
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
