How LOIs Can Go Horribly Wrong

Hashish companies usually use letters of intent (LOIs) to get agreed deal phrases in writing earlier than spending money and time negotiating the definitive written contract. LOIs could be a huge assist, particularly with a sophisticated deal. However they’re simple to botch, and may result in some fairly devastating penalties if not executed proper.

Watch out for unintended binding LOIs

Within the majority of conditions, events to an LOI need them to be totally or partially non-binding. These LOIs are meant solely to be outlines of a deal that the events can use in negotiating finer factors. Some provisions might find yourself being binding, like confidentiality or exclusivity provisions. However the majority of phrases are sometimes left to be fleshed out.

The issue is that some LOIs do a fairly dangerous job of clarifying what’s and isn’t binding. This results in two fairly dangerous potential outcomes. First, a provision meant to be binding could possibly be construed as non-binding. Think about the client in a deal wished the vendor locked in to an exclusivity obligation for 60 days after signing, however the LOI didn’t clearly specify that this was a binding obligation (versus just a few form of expectation). It’s doable that the vendor might then store the deal round with none recourse on the client’s half.

The second potential downside is presumably rather a lot worse – an LOI could possibly be deemed binding the place it was meant to not be binding. I’ll get into this in larger element within the subsequent half.

Binding LOIs could be a huge downside

Sometimes, individuals need totally binding LOIs. In nearly all instances, I feel these are a nasty concept. As a result of binding LOIs are, by definition, binding, they need to comprise a LOT extra element than your common non-binding LOI which can be as brief as a web page or two. With extra element comes extra negotiation, and extra time. So normally, if events need a binding doc, it makes much more sense to only proceed to the definitive contract and never waste time on a binding LOI that can precede it.

As an apart, there are some restricted contexts the place a binding LOI is smart regardless of these considerations. For instance, think about a take care of numerous completely different contracts to be drafted and executed at completely different instances over an extended time period, however the place the events are however keen to spend a little bit of time up entrance negotiating phrases. In that case, it might make sense to have a binding LOI, or some form of different binding settlement to flesh out these contractual obligations.

In any occasion, the place binding LOIs could be problematic is the place the negotiating events fail to incorporate ample element and mainly deal with them as binding variations of non-binding LOIs. And insufficiently detailed LOIs can result in a bunch of points. I’ve seen loads of conditions the place one occasion would have wished to incorporate extra protecting provisions in a full-length definitive, however the different occasion is aware of that the LOI is binding and refuses to barter anything. It may be a horrible consequence.

LOI fundraisers

Plenty of companies will concern press releases after inking LOIs, for advertising and marketing functions but additionally to drum up investments – particularly so for public hashish firms. As you’ll be able to think about, there could be numerous shenanigans right here as effectively. Some hashish firms will enter into an enormous quantity of LOIs with little intent to consummate the transactions. That is clearly dangerous information for his or her potential enterprise associate who might haven’t solely wasted money and time on getting the LOI executed, but additionally handed on different offers. And it could actually result in much more issues for the corporate issuing the press launch in the event that they don’t signify the proposed deal’s context precisely.

There are some fairly simple options to those issues. For instance, even a non-binding time period sheet can comprise restrictions on publicity which might be binding (although cautious wording is required!). Or one or each events might carve out exclusivity obligations or enable for LOI termination within the occasion the opposite occasion isn’t taking the deal significantly or it turns into clear that the opposite facet is attempting to fundraise off the LOI.

Non-attorney drafted LOIs

Individuals suppose that as a result of LOIs are usually not binding and meant to function a top level view, legal professionals are pointless. The issue with this prepare of thought is that it could possibly be extremely simple for non-lawyers to write down an LOI that was meant to be non-binding, however fail to truly make it non-binding. Or they may draft an deliberately binding LOI that fails to incorporate ample element. Or they may make 100 different varieties of errors that would have been prevented.

As I wrote a couple of years in the past, “Getting a lawyer concerned within the time period sheet course of could be key. That is very true on sophisticated or costly offers, or the place one occasion is aware of it has much less leverage in a deal to request adjustments at a later date. It’s much more true the place the opposite facet or their legal professionals are going to be powerful negotiators.”

To flesh that out a bit extra, as a deal define, the LOI would be the one of many key issues that legal professionals look to when negotiating a contract for the lifetime of the negotiation. I can’t let you know what number of instances I’ve heard legal professionals complain that one thing was “not within the LOI” or “completely different from what’s within the LOI” throughout negotiations, even when the LOI was clearly not binding. And in numerous instances, events will merely agree to stay to what the unique intent was.

All of that is to say that an LOI is an extremely vital funding. Good legal professionals don’t have to cost an arm and a leg on them, and a very good LOI can save a ton of headache down the street. That is particularly the case in a extremely regulated business the place one or each of the events to a deal could also be much less conversant in regulatory intricacies when negotiating the LOI.