How to get beyond the letter of intent

After a couple of weeks of negotiations between a seller and buyer of a company, the parties enter into a final letter of intent.

Does this mean you are almost done or just getting started? As is often the case in the world of mergers and acquisitions, the answer is, it depends.

It depends on the process used to get to the point of having a letter of intent. It also depends on your perspective. From the view of the investment banker, there has likely been a period of months dedicated to putting confidential information together, arranging for and supporting management presentations, combing through indications of interest, selecting the most promising buyers and negotiating with buyers until you have a signed letter of intent.

From this vantage, one would be tempted to say, or at least hope, the deal is near the finish line. But assuming the process leading to the signed letter of intent did not involve detailed drafts of the proposed agreement, there is still a lot of negotiation remaining.

Although legal counsel should have been involved for quite some time at this point, this is where a phrase such as, "and the definitive agreement will contain such other agreements, representations, warranties, indemnifications and conditions as are customary for transactions similar to the contemplated acquisition," needs to be translated into about 60 pages of text with the potential for negotiation on dozens of points.

Certainly, the parties may have negotiated a fairly detailed letter of intent. There are differing schools of thought on how much detail is enough at the letter of intent stage. Case-by-case deal dynamics and a careful analysis of the process that has led to the negotiation of the letter of intent will often dictate the best approach. But regardless of whether you have a five-page or 15-page letter of intent, you should expect that a substantial amount of meaningful detail remains to be finalized between the parties.

What, then, is the path forward? There is no substitute for counsel rolling up their sleeves and doing the hard work. One party's counsel will draft a definitive acquisition agreement and send it to the other party's counsel. A series of markups, revised drafts and negotiating sessions follow.

In an attempt to try to determine, and effectively advocate, what is customary or market, law firms, investment banks and others have conducted various surveys and compiled reports about the scope and frequency of certain key provisions in acquisition transactions. The most recent and best one for privately held companies is the American Bar Association's 2007 Private Target Mergers and Acquisitions Deal Points Study. Although it is a useful tool and one that every M&A professional should be familiar with, it has its limitations.

Nevertheless, the study is instructive on a variety of points. The study, released in August, contains 83 slides covering financial provisions, representations and warranties, closing conditions, indemnification and dispute resolution clauses.

The study is a useful tool because it provides an unbiased review of 143 acquisition agreements involving private targets for transactions completed in 2006, which were available on the EDGAR filing system. Of course, the study has its limitations because only transactions required to be filed by public buyers are included, so private buyer and private seller deals and deals by public buyers that did not meet the threshold for filing with the SEC are not included in the analysis. However, the sample is large enough to reveal trends for certain critical M&A provisions, such as closing conditions and indemnification rights and limitations.

Although no study can tell deal participants what the customary provisions are that should ultimately be in their definitive agreement, the 2007 ABA Private Target Study and others like it can provide useful data about how often certain provisions are being used.

The idea of a customary set of off-the-rack provisions is more myth than reality, and for good reason. Each M&A deal has unique risks, opportunities and challenges.

But there are frequently used methods of addressing issues and valuable tools, such as good deal studies, that can effectively assist parties in reaching a well-negotiated and thoughtful result.

Greg Giammittorio (ggiammittorio@mofo.com) is an attorney at Morrison and Foerster LLP.

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