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LETTER OF INTENT FOR THE PURCHASE OF ASSETS
Notes to Consider:
Has there been any discussion between the parties concerning, for example:
(a)escrow of part of the purchase price;
(b)employees (key personnel the Purchaser wants to keep);
(c)preparation of interim or closing financial statements;
(d)accounting principles to be used in preparation of closing financial statements;
(e)environmental audits;
(f)collection of accounts receivable (if they are not being transferred);
(g)buy-back of receivables that are transferred but not collectible;
(h)duration of the Vendor’s indemnification obligations;
(i)inventories; or
(j)transitional services if needed by Purchaser.
“Binding Issue”:
Letter should be signed by each person to be bound, including, where appropriate, persons controlling the parties.
In the U.S., there are a number of cases in which letters of intent have been held to be binding or to create obligations despite attempts at non-binding language in them. Letters of intent have also been found to be binding where all of the substantive terms of a transaction have been agreed in the letter. Consider the following alternative non-binding clause if the parties are particularly concerned or if one is an American.
“This document is only a list of proposed points that may or may not become part of an eventual contract. It is not based on any agreement between the parties. It is not intended to impose any obligation whatsoever on either party, including without limitation, an obligation to bargain in good faith or in any way other than at arms’ length. The parties do not intend to be bound by any agreement until both agree to and sign a formal written contract, and neither party may reasonably rely on any promises inconsistent with this paragraph. This paragraph supersedes all other conflicting language.”
However, if the parties do want some clauses to be binding, such as the no-shop clause and a confidentiality clause, they should specify these to be binding or separate them out into a separate document.
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LETTERHEAD OF PURCHASER
[Date]
CONFIDENTIAL
[Name and Address of Vendor]
Dear :
Proposed Acquisition of the Assets of (the “Vendor”) by (the Purchaser”)
This letter will serve as an expression of the Purchaser’s intent to acquire, directly or through an affiliate, the business of [the Vendor or the Vendor’s division] (the “Business”), as a going concern, on the basis substantially as outlined below (the “Proposed Transaction”). It is anticipated that the Proposed Transaction will be structured as an acquisition of [the] assets of the Vendor relating to the Business.
The following sets out the principal terms of the Proposed Transaction:
- Assets
[Except as described below,] and subject to the terms and conditions set out below and in the definitive agreement, the Purchaser will purchase all of the assets, tangible and intangible, of Vendor used in the operation of the Business including [list any specific assets particular to the transaction].
- Purchase Price
The purchase price (the “Purchase Price”) for the assets will be [insert $ amount or formula on which the price is to be based]. The Purchase Price will be paid or satisfied as follows:
-cash on closing, less a specified holdback
-assumption of liabilities
-issuance of a promissory note (secured or unsecured, interest rate, term)
-issuance of shares of the Purchaser (how many, how and when are they to be priced).]
[Detail any adjustments to be made to the price after closing based, for example, on closing financial statements, net working capital, net debt or inventory count. ]
- Liabilities
The Purchaser will not assume any liabilities of the Vendor other than:
(i)[list assumed liabilities]
The Vendor shall remain responsible and indemnify the Purchaser for and in respect of all other liabilities, debts or obligations of the Vendor of every nature and kind. [Detail any specific liabilities which are known and which the Purchaser is not to assume, i.e., lawsuits, liabilities relating to employees who are not being taken on, environmental risks.]
- Non-Competition
The Vendor shall deliver non-competition, non-solicitation and confidentiality covenants relating to the Business restricting the Vendor or any of its affiliates from competing with the Business in [territory], [soliciting/employing] employees of the Business or disclosing confidential information of the Business for a period of years following the closing date of the Proposed Transaction.
- Due Diligence
The Purchaser and its representatives will be provided with free and unrestricted access to the assets, books, records, personnel and premises of the Vendor relating to the Business in order to conduct its legal, operational and financial review of the assets and the Business. The Proposed Transaction is subject to completion of the Purchaser’s investigation of the assets, affairs and condition of the Business, and satisfaction with the results of such investigation in the Purchaser’s sole discretion.
- Employee Matters
The Purchaser [will, to the extent required by applicable law, become the successor employer in respect of the unionized employees under the collective agreements and the Purchaser] will offer employment to all [non-unionized] employees actively engaged in the Business [(other than )] on terms and conditions [determined by the Purchaser].[1] Vendor will be responsible for any employees to whom Purchaser does not make an offer of employment and for any liabilities arising from employees who do not accept Purchaser’s offer of employment.
[As a condition of completing the Proposed Transaction and shall have entered into employment agreements [detail terms] for a period of no less than years.]
- Definitive Agreement
The parties will enter into a definitive agreement containing terms, conditions and indemnities customary for transactions of this nature including, without limitation, the following:
(a)Representations and Warranties – The definitive agreement will contain representations and warranties which are typical of transactions of this nature including as to the Vendor’s title to the assets of the Business and as to the assets, operations, financial condition and tax position of the Business, which will fully protect the Purchaser in respect of any undisclosed liabilities or contingencies associated with the past operations of the Business. [In particular, the Purchaser must be satisfied that there are no adverse environmental conditions affecting the Business and expects complete representations, warranties and indemnities for environmental issues.]
(b)The representations and warranties will survive the closing of the transaction.
(c)Conditions – The definitive agreement will also contain conditions of closing customary in transactions of this sort, including without limitation:
(i)Approvals – receipt of all [shareholder,] regulatory and [material] third party approvals (including );
(ii)Business in the Ordinary Course – that the Business shall have been conducted by the Vendor in the usual and ordinary manner and the Vendor has used all reasonable efforts to maintain good relations with its employees, customers and suppliers;
(iii)No Material Adverse Effect – that there shall have been no change, effect or circumstance that is or has been materially adverse to, or could reasonably be expected to have a material adverse effect on, the financial condition, results of operations, assets or prospects of the Business for any reason including as a result of the Proposed Transaction; [other than those resulting from industry-wide conditions or general economic conditions affecting the industry in which the Business is carried on];
(iv)[Bulk Sales Legislation– Vendor shall have complied with any legislation addressing the sale of its assets in bulk;]
(v)Representations – the continuing truth and accuracy of all representations and warranties and the fulfilment of all Vendor covenants, obligations and agreements;
(vi)[Board Approvals – the approval of the board of directors of the Purchaser]; and
(vii)[Key Employees – execution and delivery of employment agreements for key employees];
(viii)[where necessary – add government certification and non-expropriation agreements].
(d)[Indemnities – The definitive agreement will provide that the Vendor will indemnify the Purchaser for any breach of any covenant, any breach of any representation or warranty [(but only if such breach or the aggregate of all such breaches has exceeded the sum of $, in which event the Vendor shall be responsible for the full amount of all claims of the Purchaser)] and for various other matters reasonably required by the Purchaser.] [The obligation to indemnify for breach of certain representations or warranties will fall away after a period of [3] years from the closing date.]
- Closing
The Purchaser anticipates closing the transaction as soon as possible following completion of its due diligence review and receipt of regulatory approvals but, in no event, later than [insert drop dead date].
- Business in the Ordinary Course
From the date of this letter to the completion of the Proposed Transaction or termination of negotiations, the Vendor shall conduct the Business in the usual and ordinary manner and use all reasonable efforts to maintain good relations with its employees, customers and suppliers [and shall not, without the prior written consent of the Purchaser, enter into any material commitment or transaction with respect to the Business].
- Confidentiality
[Note: Include only if there is no confidentiality agreement and if Vendor requests this.]
The parties shall treat as confidential, the existence and terms of this letter of intent including the fact that the parties are discussing a Proposed Transaction. All information provided to a party by the other or its representatives shall be kept in the strictest confidence and not disclosed to a third party or used by the party receiving such information save and except for the consideration and completion of the Proposed Transaction or except as required by a Court of competent authority or any applicable securities legislation. The foregoing restriction does not apply to any information which is or becomes generally available to the public, or which was known to such party prior to its receipt of information from the other party or which such party obtained from an independent third party who obtained the information lawfully and was under no obligation of confidentiality with respect to the information.
- Publicity
All public notices to third parties and all other publicity concerning this letter of intent and the Proposed Transaction shall be jointly planned and coordinated by the Vendor and the Purchaser and neither party shall act unilaterally in this regard without the prior approval of the other party (such approval not to be unreasonably withheld), except where required to do so by law or by the applicable regulations, rules or policies of any governmental or other regulatory agency having jurisdiction in respect of the party [or of any stock exchange], in each case in circumstances where prior consultation with the other party is not practicable and a copy of such disclosure is provided to the other party [at the same time as it is made to the governmental or regulatory authority].
- Exclusivity
For a period of [90 days] following the acceptance of this letter of intent or, provided the parties are negotiating the terms and conditions of a definitive purchase and sale agreement, for such longer period as may be necessary to complete the negotiations, the Vendor (a) will work exclusively with the Purchaser in an effort to negotiate the definitive agreement and complete the Proposed Transaction, (b) will not, directly or indirectly, enter into or pursue any discussions with, provide information to, or enter into any agreement with any other person which, if completed, would result in the direct or indirect disposition of the Business or any assets of the Business (other than sales of inventory in the ordinary course of business) or take any action which would adversely affect the ability of the Purchaser to complete the Proposed Transaction, and (c) will promptly advise the Purchaser of its receipt of any unsolicited proposals.
[Note: If acting for a Vendor of a public company, consider need for exceptions; eg. “Subject to the fiduciary obligations of the directors of the Vendor …” etc.]
- Costs
Each of the Purchaser and the Vendor will be responsible for and bear all of its own costs and expenses (including any broker’s or finder’s fees and the expenses of its representatives) incurred at any time in connection with negotiating, pursuing or completing the Proposed Transaction.
- Status of this Letter of Intent
It is understood that this letter of intent is a statement of our intention to proceed as outlined above, is not an offer and does not create any legally binding obligations of any party (other than the obligations set out in paragraphs [9, 10, 11, 12, 13, 15 and 16] which shall be legally binding (the “Binding Provisions”)). Any purchase will be subject to the execution of a definitive agreement of purchase and sale to be negotiated by the parties.
- Entire Agreement
The Binding Provisions [and the Confidentiality Agreement dated ] constitute the entire agreement between the parties, and supersede all prior agreements, understandings, representations and warranties, negotiations and discussions, whether oral or written, and course of conduct and dealing between the parties relating to the subject matter of this letter of intent including [the letter expressing our preliminary indication of interest dated ].
- Governing Law
The Binding Provisions will be governed by and construed in accordance with the laws of .
Upon your execution of this letter of intent the Purchaser will instruct its solicitors to commence preparation of the definitive agreement for review by the parties.
If this letter accurately reflects our discussions, please acknowledge by signing and returning a duplicate copy of this letter to the undersigned.
Yours very truly,
[Purchaser]By:
Acknowledged and agreed to this day of .
[Vendor]By:
[1]Vendor will usually require offers of employment to be on substantially similar terms and conditions of employment.