#10209 - Heads Of Agreement Aka Letter Of Intent

A heads of agreement/letter of intent is a good preliminary way to probe the target Company and its general conditions. As it is overall a non-binding document it is a good way to determine whether the transaction should go ahead as proposed. It may be possible that the contents of the letter of intent (although generally very wide and general) could disclose problems with the company which the buyer did not know e.g. liabilities that the buyer is not willing to take on and therefore will change what was originally a Share acquisition into an Asset acquisition in order to limit its liability. It is also a good way to determine the price of the target company.

e.g. “Until signing the SPA each of us shall be entitled to break off the negotiations at any time without thereby incurring any liability to the other beyond the obligations provided for in this letter”

	England &Wales	Continental Europe
Legally Binding P.37	No. Parties include a “subject to agreement” clause in the contract to avoid it being binding. Agreements to agree are not enforceable under English law unless there the parties have agreed a clear and unequivocal mechanism for fising that which is to be agreed (Foley v Clasique Coaches). But parties may expressly agree that some terms in the Heads be binding e.g. confidentially, exclusivity of bargaining and liability for costs. Non-contractual obligations are governed by Rome II, Article 12 – if arising out of pre-contractual dealings the law applicable is that which applies to the contract.	In civil jurisdictions like France and Germany it is possible to enter into an Agreement to Agree. Agreements to Agree are not enforceable under English law. If there is a cross-border transaction an Agreement to Agree clause could, in principle, be avoided by carefully drafting the letters to make it clear that there is no intention to agree to agree. However, even this may be proven futile in jurisdictions such as France and the Netherlands or in Spain if the parties carry on negotiating.
Duty to negotiate in good faith P.37	P.38 No - agreements to negotiate in good faith are not enforceable because they lack the necessary certainty. But an undertaking for a limited period of time to negotiate in good faith can be enforceable if the obligation is sufficiently certain. In US Law. There is No obligation to negotiate in good faith.	Yes. Known as “Culpa in Contrahendo” and the duty extends to all phases of the commercial relationship, pre-contractual and contractual. The exact scope of this duty of good faith varies from country to country, but usually includes the following obligations: (a) to inform each other where reasonable of all points which, if known by the other party, might be expected to lead it to change its views on material aspects of the transaction; (b) to observe reasonable diligence in the performance of pre-contractual obligations; and (c) to observe general ethical standards of behaviour. (i.e. not break off negotiations without good reason) France – YES it is ablaible under tort law
Exclusivity P.38	Yes, under Walford v Miles, an Exclusivity or Lock-out clause is enforceable provided it is sufficiently certain. There are four elements: 1. Clause Has to state that it is an agreement not to negotiate with anyone else (thus it has to be drafted in negative terms to make it sufficiently certain e.g. “You should not negotiate with other parties”) 2. Clause should state that exclusivity is for a specific/fixed period of time. 3. Clause Should include a remedy in the event of a breach (usually the recovery of costs incurred in pursuing the acquisition.) In Radiant Shipping Co and Sea containers, costs incurred before the execution of the agreement could be recovered if it was expressly provided for as long as it did not amount to a penalty. 4. The clause should state the Consideration. It must be given in order to render exclusivity clause enforceable (usually the B’s promise to finance the DDR) But no good faith accepted.	Yes, unless the obligation binds the parties for an unreasonable period of time. Performed in accordance with the duty of good faith. And thus parties cannot break off negotiations without reasonable cause. Violation of this entitles the...

Legally Binding

P.37

No. Parties include a “subject to agreement” clause in the contract to avoid it being binding.

Agreements to agree are not enforceable under English law unless there the parties have agreed a clear and unequivocal mechanism for fising that which is to be agreed (Foley v Clasique Coaches).

But parties may expressly agree that some terms in the Heads be binding e.g. confidentially, exclusivity of bargaining and liability for costs.

Non-contractual obligations are governed by Rome II, Article 12 – if arising out of pre-contractual dealings the law applicable is that which applies to the contract.

In civil jurisdictions like France and Germany it is possible to enter into an Agreement to Agree. Agreements to Agree are not enforceable under English law.

If there is a cross-border transaction an Agreement to Agree clause could, in principle, be avoided by carefully drafting the letters to make it clear that there is no intention to agree to agree. However, even this may be proven futile in jurisdictions such as France and the Netherlands or in Spain if the parties carry on negotiating.

Duty to negotiate in good faith

P.37

P.38 No - agreements to negotiate in good faith are not enforceable because they lack the necessary certainty. But an undertaking for a limited period of time to negotiate in good faith can be enforceable if the obligation is sufficiently certain.

In US Law. There is No obligation to negotiate in good faith.

Yes. Known as “Culpa in Contrahendo” and the duty extends to all phases of the commercial relationship, pre-contractual and contractual.

The exact scope of this duty of good faith varies from country to country, but usually includes the following obligations:

(a) to inform each other where reasonable of all points which, if known by the other party, might be expected to lead it to change its views on material aspects of the transaction;

(b) to observe reasonable diligence in the performance of pre-contractual obligations; and

(c) to observe general ethical standards of behaviour. (i.e. not break off negotiations without good reason)

France – YES it is ablaible under tort law

Exclusivity

P.38

Yes, under Walford v Miles, an Exclusivity or Lock-out clause is enforceable provided it is sufficiently certain. There are four elements:

1. Clause Has to state that it is an agreement not to negotiate with anyone else (thus it has to be drafted in negative terms to make it sufficiently certain e.g. “You should not negotiate with other parties”)

2. Clause should state that exclusivity is for a specific/fixed period of time.

3. Clause Should include a remedy in the event of a breach (usually the recovery of costs incurred in pursuing the acquisition.) In Radiant Shipping Co and Sea containers, costs incurred before the execution of the agreement could be recovered if it was expressly provided for as long as it did not amount to a penalty.

4. The clause should state the Consideration. It must be given in order to render exclusivity clause enforceable (usually the B’s promise to finance the DDR)

But no good faith accepted.

Yes, unless the obligation binds the parties for an unreasonable period of time.

Performed in accordance with the duty of good faith. And thus parties cannot break off negotiations without reasonable cause.

Violation of this entitles the...

#10209 - Heads Of Agreement Aka Letter Of Intent - Mergers and Acquisitions (Private Acquisitions)

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