When–and why–should a party consider signing a letter of intent? Shook Partner Scott McCandless looks at the advantages and potential risks in “A Look Inside the Finer Points of Letters of Intent,” in Ingram’s, July 2017. The advantages for those considering a business deal, McCandless says, are that a letter of intent (LOI) can set out the proposed basic terms, identify key issues, address potential problems up front and even protect against later selective memory.
In addition, he says, an LOI can help to bind the parties to confidentiality, “no-shop” clauses, or expenses. But parties must also be careful not to inadvertently bind themselves to terms or transactions they don’t want. That’s especially important if no final deal is reached and a court is asked to determine whether the LOI is binding or enforceable.
“Whether or not to use an LOI in any given deal depends on many factors,” McCandless says. “If the parties proceed with an LOI, and depending on the goals, they should make it expressly non-binding (with carve-outs) and make clear there is no duty to negotiate in good faith, and should not act in a manner inconsistent with the LOI.”