Fillable Printable Letter of Intent

Letter of Intent

From the Model Stock Purchase Agreement, Second Edition. The Prefaces, Preliminary Notes, Appendices, and Commentary to the

second edition of the Model Stock Purchase Agreement, Exhibits, and Ancillary Documents are protected under United States

Notwithstanding assertions other w ise, the Model Stock Purchase Agreement itself and it Exhibits and Ancillary Documents, as they

appear in the printed publication and on its accompanying CD-ROM, may be freely reproduced by the reader.

Model Stock Purchase Agreement, Second Edition

ANCILLARY DOCUMENT B

Letter of Intent

PRELIMINARY NOTE

A letter of intent is often entered into between a buyer and a seller following the

successful completion of the first phase of negotiations of an acquisition transaction. The

letter generally, but not always, describes the purchase price (or a formula for

determining the purchase price) and certain other key economic and procedural terms

that form the basis for further negotiations. In most cases, the buyer and the seller do not

yet intend to be legally bound to consummate the transaction and expect that the letter of

intent will be superseded by a definitive written acquisition agreement. Alternatively,

buyers and sellers may prefer a memorandum of understanding or a term sheet to reflect

deal terms.

Although the seller and the buyer will generally desire the substantive deal terms

outlined in a letter of intent to be nonbinding expressions of their then current

understanding of the shape of the prospective transaction, letters of intent frequently

contain some provisions that the parties intend to be binding. As discussed more fully

below, the binding provisions of a letter of intent generally relate to the process of

conducting the negotiations and procee ding towards a definitive agree ment.

A client should have the benefit of its lawyer’s advice before entering into a letter

of intent. What portions of the letter of intent should be binding or nonbinding and the

risks of entering into a letter of intent at all are important issues with a heavy legal

overlay. The level of detail in the letter of intent and which issues should be addressed or

deferred are key strategic questions that should be discussed with the client, and their

likely impact on the negotiation of the acqui sition should be fully explored.

There are several reasons why letters of intent are used. A buyer and a seller

frequently prefer a letter of intent to test the waters before incurring the costs of

negotiating a definitive agreement and performing due diligence. The parties may also

feel morally, if not legally, obligated to key terms once they are set down in writing.

Sometimes the deal terms are sufficiently complicated that it is helpful to put them down

in writing to ensure that the buyer and seller have consistent expectations.

Signing a letter of intent at an earlier stage of the acquisition process, rather than

waiting for the definitive agreement, can facilitate compliance with regulatory

requirements. For example, a premerger notification form can be filed under the HSR Act

upon entering into a letter of intent, thereby starting the clock on the applicable waiting

period. See the discussion of the HSR Act in Section 1.1 of the Model Agreement. A

signed letter of intent may also assist the buyer in convincing prospective lenders or

investors to evaluate the transaction for the purpose of providing financing. The letter of

From the Model Stock Purchase Agreement, Second Edition. The Prefaces, Preliminary Notes, Appendices, and Commentary to the

second edition of the Model Stock Purchase Agreement, Exhibits, and Ancillary Documents are protected under United States

Notwithstanding assertions other w ise, the Model Stock Purchase Agreement itself and it Exhibits and Ancillary Documents, as they

appear in the printed publication and on its accompanying CD-ROM, may be freely reproduced by the reader.

intent often provides an outline for the transaction that can be used as the basis for

drafting the definitive agreement.

Letters of intent are also used to define the rights and obligations of the parties

while a definitive agreement is being negotiated. For example, an exclusivity provision is

often included, which prohibits the seller from negotiating with another party while

negotiations with the buyer are ongoing. A letter of intent, either alone or in conjunction

with a separate confidentiality agreement, will usually permit the buyer to inspect the

target’s properties and to review its operations and books and records while

simultaneously restricting the buyer's ability to disclose and use the target’s trade secrets

and other proprietary information received during the negotiations. A letter of intent often

covers how expenses of the acquisition and negotiations, such as fees and expenses of

brokers, attorneys, and other advisors, will be paid and limits the rights of each party to

publicize the acquisition or negotiations without the consent of the other party. A letter of

intent may establish the time frame for conducting due diligence and closing the

acquisition and certain other milestones and pre-conditions prior to the execution of a

definitive agreement or the closing of the transa ction.

Many commentators and business lawyers believe that the effect of a letter of

intent is generally more favorable to the buyer than to the seller. An exclusivity provision

in the letter of intent may prevent the seller from introducing other interested parties to

the acquisition to enhance its negotiating position with the buyer. In those cases where a

letter of intent is not used, the buyer might consider entering into a separate exclusivity

agreement with the seller. If actual or suspected problems are uncovered during due

diligence, the buyer may try to use that information to negotiate a lower purchase price or

more favorable terms. A signed letter of intent, even if not binding, together with the

buyer’s inspection of the target’s properties and review of its operations and books and

records, often will create an expectation on the part of the target’s employees, vendors,

customers, lenders, or investors that a sale to the buyer will occur. Buyer’s investigation

of the target may also uncover information that can be used by the buyer to compete with

the target if the sale is not consummated, even if the target receives protection against

the disclosure or use by the buyer of the target’s trade secrets and other proprietary

information.

Notwithstanding these considerations, a seller is often as insistent as a buyer

that a letter of intent be executed before work on a definitive agreement is begun. One

reason may be that the negotiation of a letter of intent provides the seller with an

excellent opportunity to negotiate certain key acquisition issues at a time when the seller

possesses maximum leverage. The seller may also feel pressure to show some

evidence of a prospective transaction to lenders or other interested persons. If the seller

is not bound by an exclusivity provision, it may want to use the letter of intent to prompt

other potential buyers to compete for the business transaction opportunity.

A controlled auction process (see M&A P

ROCESS ch. 6) may or may not include a

letter of intent, depending on how the process is conducted, the completeness of

documentation, and other timing issues.

Although letters of intent are common, no consensus exists among business

lawyers regarding their desirability. Many lawyers advise their clients that the great

disadvantage of a letter of intent is that provisions intended by the parties to be

nonbinding may be later found by a court to be binding. There is often an inherent

conflict between the goals of the parties in negotiating a letter of intent. The buyer

generally is most interested in securing exclusivity or other standstill types of provisions

From the Model Stock Purchase Agreement, Second Edition. The Prefaces, Preliminary Notes, Appendices, and Commentary to the

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appear in the printed publication and on its accompanying CD-ROM, may be freely reproduced by the reader.

from the seller while seeking to maintain great flexibility regarding the purchase price and

other key provisions that may be impacted by the results of the buyer’s acquisition review

of the target. The seller, on the other hand, generally will attempt to define more clearly

the purchase price, limitations on its exposure with respect to the representations that will

be part of the definitive agreement, and key terms of employment agreements,

noncompete covenants, and other ancillary arrangements. If possible, the seller will

prefer to avoid altogether, or to limit the scope of, any exclusivity commitment. The

negotiation of a letter of intent can sometimes become bogged down in detailed

discussions that are generally reserved to the negotiation of the definitive agreement.

Because of these twin concerns of the possible, but unintended, binding nature of the

letter of intent and the risk that the negotiation of the letter of intent will become mired in

endless detail, lawyers often advise their clients to forgo a letter of intent and commence

negotiation of a definitive agreement.

It is helpful at the outset to determine the client’s desires as to whether a letter of

intent is binding. For example, the acquisition may be so economically or strategically

attractive that the client is willing, as a business decision, to risk being bound at this initial

stage. The parties might also intend to be bound if the acquisition review has been

completed and all economic issues have been settled. However, a fully binding letter of

intent can lead to problems and unexpected results if the parties later are unable to agree

to the terms of a definitive agreement. In that event, a court may impose upon the parties

its interpretation of commercially reasonable terms for any unresolved issue s.

At the stage in the transaction when the letter of intent is signed, the transaction

itself usually is still conditional in nature. Most often, many terms have not even been

considered, much less discussed or settled. Moreover, due diligence is rarely completed

at this stage and quite often not even commenced, and both parties may be oblivious to

many potential pitfalls. Accordingly, the buyer may want to avoid specifics on many

business deal points. This strategy may enhance the buyer’s negotiating position by

deferring discussions on these key issues until after the buyer has completed its due

diligence and the seller’s negotiating position has been compromised by executing a

letter of intent. The seller, on the other hand, will want in most cases to resolve all

important issues at the letter of intent stage when the seller may have its greatest

negotiating leverage. For example, the seller may want to negotiate limitations with

respect to its indemnification obligations in the letter of intent by providing for a cap, a

basket, an expiration of the indemnification obligations, reliance on the indemnity

provisions as the buyer’s exclusive remedy, or some combination of these concepts. The

seller may also seek to avoid guaranties and draconian escrows at the outset by facing

these issues at the letter of intent stage.

Legal Principles

The legal principles for determining whether a letter of intent is binding are fairly

easy to state, although ofte n difficult to apply:

 If the parties intend not to be bound to each other prior to the execution

of a definitive agreement, the courts will give effect to that intent, and the

parties will not be bound until the agreement has been executed. This is

true even if all issues in the negotiations have been resolved. See R. G.

Group, Inc. v. Horn & Hardart Co., 751 F.2d 69 (2d Cir. 1984); V’Soske

v. Barwick, 404 F.2d 495 (2d Cir. 1968).

From the Model Stock Purchase Agreement, Second Edition. The Prefaces, Preliminary Notes, Appendices, and Commentary to the

second edition of the Model Stock Purchase Agreement, Exhibits, and Ancillary Documents are protected under United States

Notwithstanding assertions other w ise, the Model Stock Purchase Agreement itself and it Exhibits and Ancillary Documents, as they

appear in the printed publication and on its accompanying CD-ROM, may be freely reproduced by the reader.

 On the other hand, if the parties intend to be bound prior to the execution

of a definitive agreement, the courts will also give effect to that intent and

the parties will be bound even though they contemplate replacing their

earlier understanding with a definitive agreement at a later date. See

Texaco, Inc. v. Pennzoil Co., 729 S.W.2d 768 (Tex. App. 1987), cert.

denied, 485 U.S. 994 (1988); but see Durbin v. Dal-Briar Corp., 871

S.W.2d 263 (Tex. App. 1991); cf. Isern v. Ninth Court of Appeals, 925

S.W.2d 604 (Tex. 1996) (superseded by statute), cert. denied, Watson v.

Isern, 117 S. Ct. 612 (1996); R. G. Group, 751 F.2d at 74; V’Soske v.

Barwick, 404 F.2d 495 (2d Cir. 1968).

 Parties intending to be bound prior to the execution of a definitive

agreement will be bound even if there are certain issues that have not

been resolved. Depending upon the importance of the open items, the

courts will either supply commercially reasonable terms for those

unresolved issues or impose a contractual duty on the parties to

negotiate the resolution of those issues in good faith. See Itek Corp. v.

Chicago Aerial Indus., Inc., 248 A.2d 625 (Del. 1968). When the courts

impose a duty to negotiate open terms in good faith, they will impose

liability if one party acts in bad faith. See Fickes v. Sun Expert, Inc., 762

F. Supp. 998 (D. Mass. 1991). On the other hand, if the parties do

negotiate in good faith, the fact that a final agreement is not reached will

not result in liability. See Feldman v. Allegheny Int’l, Inc., 850 F.2d 1217

(7th Cir. 1988). See also Copeland v. Baskin Robbins U.S.A.,

117 Cal. Rptr. 2d 875 (Cal. App. 2002) (contract may constitute

agreement to negotiate in good faith).

In determining whether the parties intend to be bound, the courts generally

examine the following factors:

 the actual words of the document;

 the context of the negotiations;

 whether either or both parties have partially performed their obligations;

 whether there are any issues left to negotiate; and

 whether the subject matter of the discussions concerns complex

busine ss matters that customarily involve definitive written agreements.

See Teachers Ins. and Annuity Ass’n v. Tribune Co., 670 F. Supp. 491 (S.D.N.Y. 1987);

Arcadian Phosphates, Inc. v. Arcadian Corp., 884 F. 2d 69 (2d Cir. 1989); Texaco, 729

S.W.2d at 768; R. G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69 (2d Cir. 1984).

Courts have consistently stated that the most important factor in determining

whether or which provisions in a letter of intent are binding is the language used by the

parties in the document. The language of the letter of intent should, therefore, be definite

and precise. A lawyer might advise the client, however, to avoid factual situations and

subsequent communications that have led some courts to find provisions of a letter of

intent to be binding despite language seemingly to the contrary in the document. There

are many things that can overcome the carefully crafted words in a letter of intent

purporting to make a document or certain provisions in a document nonbinding. Loosely

From the Model Stock Purchase Agreement, Second Edition. The Prefaces, Preliminary Notes, Appendices, and Commentary to the

second edition of the Model Stock Purchase Agreement, Exhibits, and Ancillary Documents are protected under United States

Notwithstanding assertions other w ise, the Model Stock Purchase Agreement itself and it Exhibits and Ancillary Documents, as they

appear in the printed publication and on its accompanying CD-ROM, may be freely reproduced by the reader.

worded e-mails, oral communications, and other actions are often given great weight by

courts in interpreting the intent of the parties. Oral statements such as “Looks like we

have a deal!” or handshakes can indicate an intent to be bound. See American

Cyanamid Co. v. Elizabeth Arden Sales Corp., 331 F. Supp. 597 (S.D.N.Y. 1971);

Computer Sys. of Am., Inc. v. IBM Corp., 795 F.2d 1086 (1st Cir. 1986). But see

Reprosystem, B. V. v. SCM Corp., 727 F.2d 257 (2d Cir. 1984), cert. denied, 469 U.S.

828 (1984); R. G. Group, 751 F.2d 75–76 (2d Cir. 1984); Seaman’s Direct Buying Serv.,

Inc. v. Standard Oil Co., 686 P.2d 1158 (Cal. 1984).

When parties to a letter of intent have clearly identified that certain provisions are

binding (such as exclusivity) and others are not, courts will enforce the binding provisions

as bargained-for agreements and not lightly read in unstated exceptions such as fiduciary

outs. See Global Asset Capital, LLC vs. Rubicon US Reit, Inc., C.A. No. 5071-VCL (Del.

Ch. Nov. 16, 2009).

Sample Letters of Intent

Two illustrative letters of intent are provided below. The first (“Long Form”) is a

much more comprehensive and legally precise form, designed to flush out many of the

pertinent issues and to make very clear which elements of the letter are binding and

which are not. The second illustrative letter of intent (“Short Form”) is a much shorter,

less formal, and less legalistic form that might be used when one or both of the parties

are very anxious to sign a letter of intent on short notice at an early stage of discussion,

while preserving protections against later litigation if negotiations break off.

Both illustrative letters of intent contemplate the proposed acquisition by a single

corporate buyer of all the outstanding capital stock of a privately held company from its

shareholders. The purchase price would be payable with a combination of cash and

notes, and a portion of the cash payment due at closing would be escrowed. This fact

pattern is consistent with the Fact Pattern for the Model Agreement.

Both illustrative letters of intent have been prepared as a buyer’s first draft,

recognizing the custom that the buyer or its counsel will generally prepare the first draft of

a letter of intent.

Letters of intent such as the Short Form that are less formal and comprehensive

can also be effective, and many clients prefer a less comprehensive approach. The

primary advantages of a comprehensive, longer letter of intent, such as the Long Form,

are: (a) issues that are deal-breakers can be identified early in the negotiation process

before substantial expenses are incurred in due diligence and the drafting of a definitive

agreement with any accompanying disclosure letter o r schedules, (b) resolution of difficult

issues at the letter of intent stage facilitates the negotiation of a definitive agreement,

permitting the buyer more time and energy to prepare for the transition to its ownership of

the target, and (c) legal counsel for both parties are sometimes more successful in

prompting their clients to focus on and understand important issues that might otherwise

be lost or misunderstood in the much more complex, definitive documents. The primary

disadvantage of a comprehensive letter of intent such as the Long Form is that it may

burden the negotiations with too many difficult issues too early in the process and may

impede the deal’s momentum or even cause a breakdown in the negotiations that may

have been avoided if certain issues had been deferred. Consideration should be given to

the strategic impact of a comprehensive letter of intent on the negotiating dynamics of a

deal before a letter of intent base d upon the Long Form is prepared.

From the Model Stock Purchase Agreement, Second Edition. The Prefaces, Preliminary Notes, Appendices, and Commentary to the

second edition of the Model Stock Purchase Agreement, Exhibits, and Ancillary Documents are protected under United States

Notwithstanding assertions other w ise, the Model Stock Purchase Agreement itself and it Exhibits and Ancillary Documents, as they

appear in the printed publication and on its accompanying CD-ROM, may be freely reproduced by the reader.

The Long Form is divided into two parts: provisions intended not to be binding

and provisions intended to be binding. The nonbinding provisions consist primarily of the

business deal points, such as a description of the proposed transaction, the purchase

price, and key ancillary agreements. The binding provisions focus on the regulation of

the negotiation process, including access for the buyer to conduct its due diligence,

exclusivity, payment of the parties’ expenses, and termination provisions. The

nonbinding and binding portions of the Long Form are clearly delineated to assist a court

in determining the intent of the parties, if that becomes necessary. Another common

format is to set out binding and nonbinding provisions without grouping them in separate

parts and to include a general statement that the entire letter of intent is nonbinding,

except for certain provisions that are specifically itemized by paragraph number. This is

the format used in the Short Form. Care should be taken where the itemization is by

reference to paragraph numbers or letters that redrafting changes do not result in

inadvertent reference to the wrong pa ragraphs.

Given the many considerations involved in negotiating a letter of intent, it cannot

be overemphasized that virtually everything in a letter of intent is subject to variation

based upon the particular context of the proposed acquisition. There is no such thing as

a standard let t er of intent applicable to al l proposed acquisitio ns.

With respect to letters of intent in general, see M&A P

ROCESS ch. 8; Kling &

Nugent Ch. 6; Spreen, Ten Practice Tips for Negotiating the Letter of Intent, DEAL LAW.

13 (May-June 2008).

LONG FORM LETTER OF INTENT

[Date]

Seller [1]

Seller [2]

. . .

Seller [8]

Ladies and Gentlemen:

This letter will confirm that __________ (“Buyer”) is interested in acquiring all the

outstanding capital stock (the “Shares”) of __________ (the “Company”) from you (“Sellers”), all the

Company’s shareholders. In this letter, (a) the Company and its subsidiaries are called the

“Acquired Companies,” and (b) Buyer’s possible acquisition of Shares (or other acquisition of the

Company) is sometimes called the “Possible Acquisition.”

PART ONE—NONBINDING PROVISIONS

The parties wish to commence negotiating a definitive written acquisition agreement

providing for the Possible Acquisition (a “Definitive Agreement”). To facilitate the negotiation of a

Definitive Agreement, the parties request that Buyer’s counsel prepare an initial draft. The

execution of any Definitive Agreement would be subject to the satisfactory completion of Buyer’s

From the Model Stock Purchase Agreement, Second Edition. The Prefaces, Preliminary Notes, Appendices, and Commentary to the

second edition of the Model Stock Purchase Agreement, Exhibits, and Ancillary Documents are protected under United States

Notwithstanding assertions other w ise, the Model Stock Purchase Agreement itself and it Exhibits and Ancillary Documents, as they

appear in the printed publication and on its accompanying CD-ROM, may be freely reproduced by the reader.

ongoing investigation of the Acquired Companies’ business and would also be subject to approval by

Buyer’s board of directors.

Based upon the information currently known to Buyer, it is proposed that the Definitive

Agreement would include the following terms:

COMMENT

The introductory paragraphs of Part One make explicit the customary practice

that the buyer and its counsel prepare the initial draft of the definitive agreement. This

allows the buyer to control the drafting process and the timing of negotiations. Sellers

may counter, requesting that the Letter of Intent contain specific dates by which drafts will

be prepared, comments re ceived, new drafts prepared, and similar deadlines.

The introductory paragraphs put Sellers on notice that the form of any definitive

agreement must be approved by Buyer’s board of directors. In addition, this provision

may provide Buyer with some protection if the nonbinding provisions are determined to

be binding and enforceable. See A/S Apothekernes Laboratorium v. LM.C. Chemical

Group, Inc., 873 F.2d 155 (7th Cir. 1989). Sellers may object to this provision and

instead insist that the Letter of Intent contain a specific confirmation that Buyer’s board

has approved the Letter of Intent.

The initial phrase of the last paragraph of this intr oductory s ection (“Ba sed on the

information currently known to Buyer. . . .”) is intended to provide Buyer with a defensible

moral and legal (if the provisions of Part One are construed to be binding) position that its

due diligence of the target may result in Buyer offering a lower purchase price or different

terms than those contained in the Letter of Intent.

1. BASIC TRANSACTION

Sellers would sell all the Shares to Buyer at the price (the “Purchase Price”) set forth in

Paragraph 2 at the closing of the Possible Transaction (the “Closing”), which is expected to be no

later than __________.

COMMENT

Paragraph 1 and each of the other paragraphs of Part One state the business

deal points of the proposed acquisition. As mentioned in the Preliminary Note, these deal

points correspond to the assumptions underlying the Model Agreement, which contains

commentary t hat may also be applicable to Part One.

In Paragraph 1 and throughout Part One, the word “would” is used This word is

intended to convey the conditional nature of the proposed acquisition and to contrast with

the more definite words used in the binding provisions of Part Two, such as “will.” Other

conditional terms may also be used, such as “prospective buyer,” “prospective seller,”

and “proposed transaction.” While the conditional language of Part One may appear

awkward and stilted at times, it provides another indication of the parties’ intent that the

provisions of Part One are not be binding.

2. PURCHASE PRICE

The Purchase Price would be $__________ (subject to adjustment as described below) and

would be paid in the following manner:

From the Model Stock Purchase Agreement, Second Edition. The Prefaces, Preliminary Notes, Appendices, and Commentary to the

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(a) at the Closing, Buyer would pay Sellers $__________ in cash;

(b) at the Closing, Buyer would deposit with a mutually acceptable escrow holder $__________,

which would be held in escrow for a period of at least __________ years in order to secure

the performance of Sellers’ obligations under the Definitive Agreement; and

promissory note. The promissory notes to be delivered to Sellers by Buyer would have an

aggregate principal amount of $__________, bear interest at the rate of __________ % per

annum, mature on the __________ anniversary of the Closing, and provide for __________

equal [annual] [quarterly] payments of principal along with [annual] [quarterly] payments

of accrued interest.

The Purchase Price assumes that the Acquired Companies have consolidated shareholders’

equity of at least $__________ as of the Closing. The Purchase Price would be adjusted based on

changes in the Acquired Companies’ consolidated shareholders’ equity as of the Closing on a dollar-

fo r-dolla r basis.

COMMENT

If Buyer expects to require an escrow or other holdback of a portion of the

proposed purchase price, it may be important to include a specific provision to that effect.

At the letter of intent stage, Buyer typically may not be able to determine or defend a

specific amount to be escrowed. Buyer will be better able to do so following its due

diligence. Even if the amount of the escrow or holdback is not yet determined, a

statement that one will be required will put Sellers on notice and should make the

subsequent negotiation of that issue easier. Obtaining Sellers’ agreement to an escrow

or holdback is difficult if the issue has not been raised prior to signing a letter of intent

and the due diligence fails to reveal any compelling n ew reasons for one.

Buyer may also want to describe known areas of potential liability, such as

environmental clean-up and pending litigation, that will affect the purchase price. By

putting Sellers on notice at an early stage that such liabilities will affect the purchase

price, escrowed amount, or other amounts held back, Buyer’s position to negotiate these

issues in the definitive agreement should be enhanced.

There are a variety of purchase price adjustment mechanisms that may be

included in any particular transaction. For example, the purchase price adjustment may

include limitations in the form of caps, collars, and floors. The parties may desire the

letter of intent to include detailed provisions describing the timing, method, and process

of calculating the purchase price adjustment, although such details are usually subject to

heavy negotiation that might be more appropriate to the negotiation of the definitive

agreement. The parties should be sensitive to the fact that post-closing purchase price

adjustments can be the subject of considerable dispute and contention, especially if they

are complex or include criteria that can be manipulated by one of the parties. The parties

may wish to reference in general terms a specific type of dispute resolution mechanism

that would be contained in the definitive agreement to address the possibility of

disagreement on the purchase price adjustment. The parties may also agree to place a

portion of the purchase price in a separate escrow to facilitate payment of the adjustment

amount. For further discussion on purchase price adjustments, see Sections 2.5 and 2.6

of the Model Agreement and related commentary.

From the Model Stock Purchase Agreement, Second Edition. The Prefaces, Preliminary Notes, Appendices, and Commentary to the

second edition of the Model Stock Purchase Agreement, Exhibits, and Ancillary Documents are protected under United States

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3. EMPLOYME NT AN D NO NC OM PETITION AGREEMENTS

At the Closing:

(a) the Company and __________ would enter into a __________ -year employment agreement

pursuant to which he/she would agree to continue to serve as the Company’s __________

and would be entitled to receive a salary of $__________ per year; and

(b) each Seller would execute a __________ -year noncom pe tition agreement in favor of Buyer.

COMMENT

The noncompetition provisions may be included within the definitive acquisition

agreement or, as provided in this sample letter of intent, as a separate agreement.

Paragraph 3 does not contemplate separate consideration for the noncompetition

covenants. The parties should consult qualified tax advisors on the tax consequences of

allocating (or failing to allocate) a portion of the purchase price to noncompetition

obligations. See the commentary to Sections 2.2 and 7.2 of the Model Agree ment.

If more than one transaction document contains noncompetition provisions, care

should be taken to ensure that they are consistent and do not cause unnecessary tax

risks. See Appendix C—Considerations Regarding Employment Agreements in

Connection with Sale of Stock and commentary to Section 7.2 of the Model Agreement

for further discussions of these and other issu es.

4. OTHER TERMS

Sellers would make comprehensive representations and warranties to Buyer and would

provide comprehensive covenants, indemnities, and other protections for the benefit of Buyer. The

consummation of the Possible Acquisition by Buyer would be subject to the satisfaction of various

conditions required to be satisfied prior to Closing, which would include, but not be limited to, the

following:

(a) Sellers will own 100% of the outstanding capital stock of the Company, and the Shares will

be free and clear of all liens and encumbrances;

(b) There will have been no material adverse change in the business or financial condition of any

Acquired Company;

(d) Between the date of the Definitive Agreement and the Closing, Sellers will cause the

Acquired Companies to operate their business in the ordinary course and to refrain from

any extraordinary transactions;

(e) The truth and accuracy of the representations and warranties of Sellers set forth in the

Definitive Agr eement;

(f) Sellers will have performed or complied in all material respects with all agreements required

by the Definitive Agreement to be performed or complied with by them; and

(g) Such other conditions as are customary in transa ctions of this type.

From the Model Stock Purchase Agreement, Second Edition. The Prefaces, Preliminary Notes, Appendices, and Commentary to the

second edition of the Model Stock Purchase Agreement, Exhibits, and Ancillary Documents are protected under United States

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appear in the printed publication and on its accompanying CD-ROM, may be freely reproduced by the reader.

COMMENT

Specific representations and covenants may be added to Paragraph 4, as well as

the survival period of representations, indemnification limits, and related provisions.

Unless Buyer has specific concerns prior to signing the Letter of Intent, Buyer will

generally prefer to defer discussions regarding these provisions to negotiation of the

definitive agreement until its due diligence of the target is more advanced and Sellers’

negotiating position may be weaker. The absence of specific provisions in the letter of

intent, however, may encourage Sellers to request a full discussion of the representations

and covenants that will be required. Moreover, Sellers may recognize that the

negotiation of the letter of intent affords it an opportunity to establish limits on

representations, covenants, and indemnities that may be subsequently difficult to obtain.

Usually, the extent of representations and indemnities given by Sellers in a particular

transaction will depend on the circumstances surrounding the transaction. For example,

the sale of a distressed company may result in a lower purchase price, but be made with

limited or no warranty protection or strict limitations on Sellers’ liability. It may benefit the

parties to use the letter of intent as an opportunity to establish a common expectation

with respect to the scope of representations, covena nts, and indemnities.

While many specific conditions to the acquisition may be omitted from a letter of

intent and included in the definitive agreement, vital, "deal-breaking" terms and conditions

are often included at this stage. If the letter of intent gives rise to an obligation to

negotiate in good faith, the introduction of new terms and conditions not included may

constitute bad-faith negotiations. In one extreme example, a buyer’s good-faith attempt,

albeit unsuccessful, to obtain financing was held to be bad-faith negotiating because the

letter of intent did not make the acquisition contingent on obtaining financing. See Bruce

v. Marcheson Implementos E. Maquinos Agriculas Tatu, S.A., 1990 U.S. Dist. LEXIS

18527 (S.D. Iowa 1990).

Buyer may want to list in Paragraph 4 all conditions precedent to the acquisition

that will eventually appear in the definitive agreement to ensure that Sellers are fully

aware at an early stage of what will be required. An alternative and more often used

strategy would be to include only those conditions that differ from the standard conditions

precedent that commonly appear in acquisition agreements and otherwise state that the

agreement would contain conditions customarily included in a gre ements of this type.

Any other key terms or assumptions of the proposed acquisition should be added

to Paragraph 4 or elsewher e in the nonbinding provisions of Part One.

PART TWO—BINDING PROVISIONS

The parties, intending to be legally bound, agree to the following legally enforceable

paragraphs of this letter.

5. ACCESS

Sellers will cause the Company to afford Buyer and its duly authorized representatives full

and free access to each Acquired Company, its personnel, properties, contracts, books and records,

and all other documents and data, subject to the Confidentiality Agreement referred to in Paragraph

From the Model Stock Purchase Agreement, Second Edition. The Prefaces, Preliminary Notes, Appendices, and Commentary to the

second edition of the Model Stock Purchase Agreement, Exhibits, and Ancillary Documents are protected under United States

Notwithstanding assertions other w ise, the Model Stock Purchase Agreement itself and it Exhibits and Ancillary Documents, as they

appear in the printed publication and on its accompanying CD-ROM, may be freely reproduced by the reader.

COMMENT

Paragraph 5 specifies Sellers’ binding obligation to cooperate in Buyer’s due

diligence investigation. Sellers must not only provide Buyer and its representatives

access to each Acquired Company’s properties and books and records but also access

to their personnel.

Sellers may be reluctant to disclose certain information about the Acquired

Companies’ customers, marketing strategies, new products, and other sensitive areas

until after the definitive agreement is executed or later. Sometimes staged access to

such informat ion is negotiated in the letter of intent.

Sellers may object to “full and free” access, which may mean regardless of the

time of day and regardless of the disruption caused. See commentary to Section 5.1 of

the Model Agreement for a discussion of reasonable access.

In the event that a significant portion of the purchase price is to be paid with

promissory notes or Buyer securities, Sellers will likely request certain information from,

and due diligence rights with respect to, Buyer. In most cases, Buyer may seek to limit

its disclosure obligations to financial information and developments that may materially

and adversely affect its business.

6. EXCLUSIVE DEALING

(a) Sellers will not, and will cause the Acquired Companies not to, directly or indirectly,

through any representative or otherwise, solicit or entertain offers from, negotiate with or in

any manner encourage, discuss, accept, or consider any proposal of any other person

relating to the acquisition of the Shares or the Acquired Companies, their assets or business,

in whole or in part, whether directly or indirectly, through purchase, merger, consolidation,

or otherwise (other than sales of inventory in the ordinary course); and

(b) Sellers will immediately notify Buyer regarding any contact between Sellers, any Acquired

Company, or their respect ive representatives and any other person regarding any such offer

or proposal or any related inquiry and if made in writing furnish a copy thereof.

COMMENT

Paragraph 6 restricts Sellers from soliciting or considering other offers to acquire

the target until the letter of intent is terminated. This provision is commonly known as an

exclusivity provision and is often the primary goal of Buyer in entering into a letter of

intent. See Section 5.6 of the Model Agreement for a more detailed discussion of these

provisions and the issues they raise. This Paragraph, which also provides that Sellers

will immediately notify Buyer of any third-party overture, should better enable Buyer to

react to a competing offer.

Buyer might require, in the event of breach, an obligation to pay fees such as the

following:

and severally reimburse Buyer’s reasonable out-of-pocket costs and

expenses incurred in the course of pursuing the Possible Acquisition

(including, without limitation, reasonable legal and financial advisor fees)