How LOIs Can Go Horribly Flawed

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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 massive assist, particularly with a sophisticated deal. However they’re simple to botch, and may result in some fairly devastating penalties if not accomplished proper.

Watch out for unintended binding LOIs

Within the majority of conditions, events to an LOI need them to be absolutely 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 reasonably 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 might be construed as non-binding. Think about the customer in a deal needed 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 may then store the deal round with none recourse on the customer’s half.

The second potential downside is presumably rather a lot worse – an LOI might 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 massive downside

Sometimes, individuals need absolutely binding LOIs. In virtually all instances, I believe these are a nasty thought. 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 most often, 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 sensible regardless of these issues. For instance, think about a take care of quite a lot of totally different contracts to be drafted and executed at totally different occasions over an extended time frame, however the place the events are nonetheless 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 might be problematic is the place the negotiating events fail to incorporate enough element and principally deal with them as binding variations of non-binding LOIs. And insufficiently detailed LOIs can result in a number of points. I’ve seen loads of conditions the place one celebration would have needed to incorporate extra protecting provisions in a full-length definitive, however the different celebration is aware of that the LOI is binding and refuses to barter anything. It may be a horrible final result.

LOI fundraisers

Numerous companies will situation press releases after inking LOIs, for advertising functions but in addition to drum up investments – particularly so for public hashish firms. As you’ll be able to think about, there might be quite a lot of 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 companion who might haven’t solely wasted money and time on getting the LOI accomplished, but in addition handed on different offers. And it might probably result in much more issues for the corporate issuing the press launch in the event that they don’t symbolize 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 can be binding (although cautious wording is required!). Or one or each events may carve out exclusivity obligations or enable for LOI termination within the occasion the opposite celebration isn’t taking the deal significantly or it turns into clear that the opposite aspect is making an attempt to fundraise off the LOI.

Non-lawyer drafted LOIs

Folks assume that as a result of LOIs should not binding and meant to function a top level view, lawyers are pointless. The issue with this practice of thought is that it might 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 might draft an deliberately binding LOI that fails to incorporate enough element. Or they might make 100 different forms of errors that might have been averted.

As I wrote a number of years in the past, “Getting a lawyer concerned within the time period sheet course of might be key. That is very true on sophisticated or costly offers, or the place one celebration 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 aspect or their lawyers 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 lawyers look to when negotiating a contract for the lifetime of the negotiation. I can’t let you know what number of occasions I’ve heard lawyers complain that one thing was “not within the LOI” or “totally different from what’s within the LOI” throughout negotiations, even when the LOI was clearly not binding. And in quite a lot of 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 essential funding. Good lawyers don’t have to cost an arm and a leg on them, and a great LOI can save a ton of headache down the highway. 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 acquainted with regulatory intricacies when negotiating the LOI.

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