What is a letter of intent (LOI)?
A letter of intent (LOI) is a document declaring the prior commitment of one party to do business with another. The letter describes the main conditions of a potential agreement. Commonly used in major commercial transactions, letters of intent have content similar to terms sheets. A major difference between the two, however, is that the letters of intent are presented in the form of letters, while the terminology sheets are listic in nature.
Letter of Intent (LAW)
Understanding letters of intent (LOI)
Letters of intent are useful when two parties are initially brought together to outline a transaction before the finer points of a transaction are resolved. Letters of intent often contain provisions that an agreement can only be reached if funding has been obtained by one or both parties, or that an agreement can be canceled if documents are not signed before a certain dated.
Since letters of intent generally discuss potential points that have not yet been realized, they are almost universally intended to be non-binding.
Letters of intent can be iterative in nature. A party may present a letter of intent, to which the other party may either oppose an amended version of this letter of intent, or draft a new document. Ideally, when the two parties meet to formalize an agreement, there will be no surprises on either side of the table.
Many letters of intent include Non-Disclosure Agreements (NDAs), which contractually stipulate the elements of an agreement that both parties agree to keep confidential, and the details of which can be shared publicly. Many letters of intent also include non-solicitation provisions, which prohibit one party from poaching the other party’s employees.
Key points to remember
- A letter of intent is a document declaring a party’s prior commitment to do business with another.
- The letter describes the main terms of a potential agreement and is commonly used in commercial transactions.
- Letters of intent are useful when two parties are initially brought together to define the main lines of a transaction before resolving the most delicate points of a transaction.
Purpose of letters of intent
Letters of intent can be used by different parties for many purposes. The parties may use a letter of intent to describe some of the basic and fundamental conditions of an agreement before negotiating and finalizing all points and details. In addition, the letter of intent can be used to signal that two parties are negotiating an agreement such as a merger or joint venture (JV).
Overall, the letters of intent aim to achieve the following objectives:
- Specify which key points of an agreement are to be negotiated.
- Protect all parties involved in the agreement.
- Advertise the nature of the agreement, such as a joint venture or a merger between two companies.
Examples of LI
In the context of commercial transactions, letters of intent are usually drafted by the legal team of a company, which describes the details of the planned action. For example, in the M&A process, letters of intent specify whether a company plans to take over another company in cash or through a share transaction.
Letters of intent also have applications beyond the business world. For example, parents can use them to express the expectations they have of their children in the event of the death of both parents. Although not legal documents like wills, letters of intent can be reviewed by family court judges who are responsible for legislating what happens to children in such circumstances.
Letters of intent are also used by those applying for government grants and by the much sought after high school university athletes. These people frequently write letters of intent to declare their commitment to attend specific colleges or universities. (For a related reading, see “What is the legal value of a letter of intent?”)