Introduction
A letter of intent (LOI) records the main terms of an intended transaction, often an acquisition, before the parties sign a definitive agreement. It marks the start of the serious phase: the buyer wants enough certainty to begin due diligence and incur costs, while the seller wants control over the process without yet committing to sell. The art lies in the distinction between what binds and what does not (yet).
The structure of the letter of intent
A letter of intent follows the logic of the phase the parties are in: first who is negotiating and about what; then the main terms of the intended transaction; next the conditions and the binding ground rules for the process (exclusivity, confidentiality, costs); and finally the term, the choice of law and the schedules. The full structure may look as follows:
- Preamble: parties and context
- Purpose and intended transaction
- Binding or non-binding?
- Key transaction terms
- Reservations and conditions precedent
- Exclusivity
- Confidentiality
- Due diligence and access
- Costs
- Term and termination
- Governing law and jurisdiction
- Schedules
Preamble: parties and context
The letter of intent opens with the parties and the context: which business or shares are involved and that the parties are negotiating. The preamble defines who commits to what and frames the rest of the document.
Example clause +
The undersigned: (1) [Buyer B.V.], having its registered office in [place] (“Buyer”);
(2) [Seller], [details] (“Seller”);
whereas the parties are negotiating the acquisition by the Buyer of the shares in [the Target Company] and wish to record the main terms in this letter of intent;
have agreed as follows:
Purpose and intended transaction
This part records what the letter of intent is for: setting out the main terms and providing a framework for the further negotiations and the definitive share purchase agreement. It makes clear that the letter itself does not yet create an obligation to complete the transaction.
Example clause +
This letter of intent records the main terms of the intended acquisition of 100% of the shares in [the Target Company] and serves as a framework for the further negotiations and the drafting of a share purchase agreement. Save for the provisions expressly designated as binding below, it creates no obligation to enter into that transaction.
Binding or non-binding?
This is the heart of any letter of intent. Most of it is non-binding: it records the intention, not an enforceable duty to close. But a few provisions are binding, usually exclusivity, confidentiality, costs and choice of law. If a letter of intent leaves this open, the greatest risk arises: a later dispute over what does and does not bind the parties. State expressly which articles are binding.
Example clause +
The provisions of this letter of intent are non-binding and create no obligation to enter into the intended transaction, save for the articles [Exclusivity], [Confidentiality], [Costs] and [Governing law and jurisdiction], which the parties have expressly agreed to be binding and which remain in force after the negotiations end.
Key transaction terms
Here are the commercial main terms on an indicative basis: the intended price and structure and the key assumptions. These remain subject to due diligence and to being worked out in the share purchase agreement, and are therefore indicative rather than binding.
Example clause +
The intended purchase price is indicatively EUR [amount], on a cash-and-debt-free basis and assuming a normalised working capital, calculated on the assumptions in Schedule [x]. The final purchase price and the method of determining it (for example completion accounts or a locked box) will be worked out in the share purchase agreement.
Reservations and conditions precedent
A letter of intent lists the conditions on which the intended transaction depends: a satisfactory due diligence investigation, financing, the required approvals and agreement on a definitive share purchase agreement. Both parties then know the reservations under which they are negotiating.
Example clause +
The intended transaction is subject, among other things, to: (i) a due diligence investigation satisfactory to the Buyer;
(ii) the Buyer obtaining financing;
(iii) the required corporate and, where applicable, merger-control approvals;
and (iv) the parties reaching agreement on and signing a share purchase agreement.
Exclusivity
With an exclusivity clause the seller undertakes to negotiate only with this buyer for a set period and not to approach other candidates. For the buyer, who incurs due diligence costs, this is one of the most important binding arrangements.
Example clause +
For [period] after signing, the Seller will negotiate exclusively with the Buyer regarding the intended transaction and will not solicit, entertain or negotiate offers from third parties. This provision is binding.
Confidentiality
The parties exchange confidential information during the negotiations and due diligence. A confidentiality clause, and keeping any earlier confidentiality agreement in force, protects both the existence and the contents of the talks. This provision is binding.
Example clause +
The parties will keep confidential the existence and contents of this letter of intent and all information exchanged in the course of the negotiations and due diligence, save for any statutory or stock-exchange disclosure obligation. Any confidentiality agreement previously concluded between the parties remains in full force. This provision is binding.
Due diligence and access
The buyer is given access to the books, records and management of the target company to carry out its investigation. This part sets out the scope and conditions of that access, always subject to confidentiality.
Example clause +
During the negotiations the Seller will, on reasonable request, give the Buyer and its advisers access to the books, records and management of the target company for the purposes of the due diligence investigation, subject to confidentiality and without unduly disrupting normal business operations.
Costs
The starting point is that each party bears its own costs, even if the transaction does not proceed. This avoids later disagreement over advisory and investigation costs incurred. This clause too is usually binding.
Example clause +
Each party bears its own costs in connection with the negotiations, the due diligence and the preparation of the transaction documentation, whether or not the intended transaction is completed. This provision is binding.
Term and termination
The letter of intent applies for a set period and ends if no share purchase agreement is signed in time. This part governs the term and how the parties may break off the negotiations, subject to precontractual good faith.
Example clause +
This letter of intent terminates automatically if no share purchase agreement has been signed before [date], unless the parties extend it in writing. Either party may break off the negotiations;
the provisions designated as binding remain in force thereafter, and any break-off is subject to what is stated below regarding broken-off negotiations.
Governing law and jurisdiction
For the binding parts (and for any dispute about the letter of intent itself) the parties record the governing law and the competent court. This clause is binding.
Example clause +
This letter of intent is governed by Dutch law. Disputes arising from it will be submitted exclusively to the competent court in [Amsterdam] at first instance. This provision is binding.
Schedules
The letter of intent refers to schedules that flesh out the main terms without burdening the text itself: the intended structure, a timeline and the confidentiality agreement.
Example clause +
Schedule 1: indicative transaction structure · Schedule 2: timeline and milestones · Schedule 3: confidentiality agreement.
What happens if negotiations break down?
Negotiations may in principle be broken off. It is otherwise only where doing so would be unacceptable by the standards of reasonableness and fairness, having regard to the other party's justified reliance on a contract coming about or to the other circumstances of the case. The Dutch Supreme Court applies a strict standard that calls for restraint: only in the final stage of the negotiations can breaking off be unacceptable, and there may then be a duty to compensate costs or even lost profit.
A well-drafted letter of intent reduces this risk: by expressly recording which provisions are binding and which are not, and by including a costs clause, it makes clear that the parties are free to walk away until the share purchase agreement is signed, save for the binding provisions. That prevents unwarranted reliance and the disputes it produces.