M&A & exit
Letter of intent (LOI)
Preliminary, mostly non-binding document outlining major M&A deal terms.
Definition
A Letter of Intent (LOI) is a preliminary document signed in early M&A negotiations to outline the major terms of a contemplated transaction. The LOI is typically mostly non-binding — its purpose is to align the parties on key economic and structural terms before they invest in detailed due diligence and definitive document drafting. Specific provisions are usually expressly binding: exclusivity (no-shop), confidentiality, expense allocation, and (sometimes) a break fee.
Same concept, different references
| Canada (common law) | Letter of intent, contractual (no specific statute) |
|---|---|
| Quebec (Civil Code) | Lettre d'intention, art. 1396+ CCQ |
| US (UCC, state law) | Letter of intent, governed by state contract law |
| UK (English law) | Heads of terms, generally non-binding |
What an LOI typically covers
The LOI captures the essential economic and structural terms before lawyers begin definitive document drafting:
- Transaction structure: share deal vs asset deal vs amalgamation; identification of buyer and seller entities
- Purchase price: indicative price or formula; cash, equity, or earn-out components
- Major conditions: due diligence completion, financing, regulatory approvals, third-party consents
- Timeline: target signing date, target closing date, exclusivity period
- Key economic terms: indicative working capital target, escrow holdback, indemnification cap and basket, employment continuation
- Binding provisions: exclusivity, confidentiality, expense allocation, governing law, dispute resolution
Binding vs non-binding distinction
The most important LOI drafting issue is which provisions bind the parties and which are merely indicative:
- Binding: exclusivity (no-shop), confidentiality, expense allocation (sometimes), break fee (rare), governing law
- Non-binding: purchase price, structure, conditions, timeline — these are intentions that may change as due diligence proceeds
- Common drafting error: ambiguity about which provisions bind. Best practice: explicit statement at the end of the LOI, e.g., 'Except for the provisions of Sections X, Y, and Z, this LOI is non-binding.'
LOI vs SPA in the deal lifecycle
The LOI is the precursor to the Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA):
- LOI signing → due diligence and definitive document drafting → SPA signing → closing
- Typical interval: 30-90 days between LOI signing and SPA signing for mid-market deals
- If the deal cannot be consummated despite the LOI's exclusivity, the parties may part ways with confidentiality intact
- Some sophisticated deals skip the LOI and go straight to a 'short SPA' or term sheet that doubles as binding agreement subject to closing conditions
In Octelligence
Diligence-ready corporate records mean LOIs convert faster.
Sellers with clean, current corporate records can move from LOI to SPA in weeks rather than months. Octelligence keeps the share register, cap table, certificates, and minute book always diligence-ready.
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Make M&A diligence faster with clean records.
SPAs convert from LOI faster, escrow holdbacks shrink, R&W insurance underwrites tighter. Octelligence keeps records audit-ready.