Letter of Intent LoI

A letter of intent sets out who intends to do what, at what price and on what assumptions. Take a buyer that writes to the owners of a family manufacturing business with an offer for all the shares. The letter names the buyer and the sellers, and states that the deal is a purchase of shares, not of assets. It gives an indicative price, explains how the price was calculated and lists the assumptions behind it.

The letter then turns to the process. It describes the due diligence the buyer wants to carry out and the access it needs. It sets a timetable and names the approvals each side still requires, for example from a board or a lender. It usually closes with the clauses that are meant to bind: confidentiality, a period of exclusivity, the allocation of costs and the governing law.

Usually only in part. The standard approach is to state that the letter creates no obligation to conclude the deal, and to name the clauses that bind from signature.

A letter of intent carries a drafting risk of its own. It is written in sentences, as a letter, and a phrase such as "the buyer will acquire" can read as a promise. Whether such a sentence binds is decided by the governing law and not by the heading. The same law decides whether a party that breaks off the talks owes the other anything.

Three drafting habits reduce the doubt. Put the binding clauses in a separate part of the letter. Say in terms that the remaining parts record intentions only. State that the deal depends on due diligence, on signed final contracts and on the approvals listed.

A letter of intent differs from them in form and in customary use more than in legal effect. All three record a deal that is still being negotiated. A letter of intent is a letter, usually from the buyer, written in full sentences. A term sheet presents the terms as a list or a table, and is the usual name in venture capital investments and in financing. A memorandum of understanding is more often used for cooperation between organisations, such as a joint project, than for a sale.

The names overlap in practice. Some firms call the same document a letter of intent in an acquisition and a term sheet in a funding round. The name is no guide to whether the document binds.

Because it settles the main points before either side spends heavily on the deal. A buyer is about to pay advisers to investigate the company. A seller is about to open its books. Each wants to know first that they agree on price, structure and timing.

The binding clauses do separate work. Exclusivity gives the buyer a period in which the seller will not negotiate with anyone else. Confidentiality protects what the seller is about to disclose, if a non-disclosure agreement is not already in place.

Yes, in principle. Article 25(1) of the eIDAS Regulation says that an electronic signature cannot be denied legal effect or refused as evidence solely because it is electronic. Article 2(3) leaves national rules on form in place, so the governing law has the last word.

A letter of intent is commonly signed by one party and countersigned by the other. What matters later is proof. A party that relies on the exclusivity clause will need to show who signed for the other side, and that the signer had authority to bind it. A qualified electronic signature has the equivalent legal effect of a handwritten one under Article 25(2), and its certificate is issued only after the provider has verified the signer's identity (Article 24(1)). It does not show the signer's authority. That still has to come from a company register extract, a board resolution or a power of attorney.

Before the business relationship is established, and that moment can come before the adviser's own engagement letter is signed. Article 19(1)(a) of the EU Anti-Money Laundering Regulation requires customer due diligence when a business relationship is established. Article 23(1) requires the client's identity to be verified before then. It allows postponement only in a lower-risk situation where the lower risk justifies it. Article 23(2) lets verification be completed while the relationship is being established, if that is needed to avoid interrupting the normal conduct of business and the risk is low. Under Article 2(1)(19), a business relationship can exist in the absence of a written contract. An adviser who drafts or negotiates a letter of intent for a client may therefore already be in one.

For acquisitions there is a second trigger. Article 19(1)(c) requires certain professionals, including lawyers, notaries, external accountants and tax advisers, to apply customer due diligence when they participate in the transfer of ownership of a legal entity, whatever the value of the transaction. The regulation applies from 10 July 2027. Until then, the national laws that implement the EU anti-money laundering directives apply.

Sparingly, because the letter opens the stage at which the seller starts handing over information about people. Article 5(1)(c) of the GDPR limits what is shared to what the purpose requires, and the letter is the first place to apply that. It can say, for example, that employee data will be provided in aggregated form until a later stage.

The other data protection rules that apply once documents are shared are the same as in any due diligence.