10. LOI -- Letter of Intent
Once agreement has been reached on all fundamental points of the sale or participation in the company, this should be recorded in a document -- a Letter of Intent (LOI) -- which should ideally be concluded before the next phase of Due Diligence and the subsequent company acquisition. By significant points, we mean that all essential details and intentions of the transaction are stated, which, subject to a positive Due Diligence outcome, will ultimately become an integral part of the purchase agreement.
In this context, there is a sense of uncertainty about whether all, none, or only some articles of the LOI are legally binding. Unlike Anglo-Saxon law, the LOI is generally not legally binding. In the case of a share sale, the purchase agreement is required in notarially certified form. Formal Letters of Intent are not legally binding. However, this may differ in the case of an asset sale, where (with the exception of real estate sales) a notarially certified purchase agreement is not required. Therefore, care must be taken to ensure that signing the LOI does not inadvertently result in a legally ineffective contract due to ambiguous wording. It is therefore advisable to expressly, preferably repeatedly and in several places, state that the parties agree that a legally binding purchase agreement will only be concluded after mutual agreement. Through the Letter of Intent, you can definitively establish the final framework conditions for the preparation of the purchase agreement.
Different, however, are those passages that are not an integral part of the purchase agreement, such as exclusivity, confidentiality, use of information obtained from Due Diligence, costs associated with the negotiation process (typically each party bears its own costs), and similar matters. These agreements are binding, and their breach is associated with corresponding claims for damages and is therefore enforceable.
The non-binding nature of the essential articles (passages) of the LOI should not, however, lead to situations where the contracting parties were, for example, intentionally misled or the meaning of certain passages was changed or altered, requiring the LOI to be reformulated before the conclusion of the purchase agreement. This would be a serious breach of trust and usually grounds for immediate termination of negotiations. The only exception is the discovery of a fact through Due Diligence that was not yet known to the buyer or was concealed.
The main points that should be included in the LOI are, for example, the purchase price, payment date, takeover date, any retentions, a precise list of the subject of the purchase, the transferor's role during the takeover, points describing the post-takeover status, employee documentation and their transfer, a non-compete clause for the seller, and more. The Letter of Intent should also state whether the buyer will have the right to continue operating the business under the same concept, or whether they may use the business name. As a rule, this will be the case. Not all points and details that will be part of the future purchase agreement will certainly be anchored in the LOI and agreed upon. It is recommended to mention these topics in the LOI, noting that the contracting parties will seek an agreement leading to the conclusion of the purchase agreement.
A time frame and scope for the subsequent Due Diligence should also be established, as well as the transferor's obligation to provide the relevant documents and information. Given that the seller must disclose significant trade secrets, it is not unusual to include a confidentiality clause, or a separate confidentiality agreement, where in the event of breach by the buyer, they agree to a contractual penalty.
Finally, clear deadlines must be set for conducting the Due Diligence, securing financing commitments, and an acceptable commitment from both parties to conclude the purchase agreement. The transferor must be aware that from a certain point, their obligation ends -- when they may no longer negotiate the sale with another buyer (e.g., end of exclusivity, or the buyer's declaration that they will not conclude the purchase agreement).