The Dutch law LOI, term sheet, MOU (or even more names for the same instrument)?
The letter of intent (LOI) is an indispensable instrument in Dutch law M&A transactions. As a Dutch corporate lawyer, I come across them in many alternative forms and everyone uses their own name for the LOI. Think for example of names like heads of terms, term sheet, memorandum of understanding, letter of intent, non-binding offer or offer letter.
On our website, we pay a lot of attention to Dutch law mergers and acquisitions (M&A). We also have a section on the website where we have published Dutch law templates of M&A contracts. In this read, we take a closer look at the Dutch law LOI, or letter of intent. In doing so, I take the Dutch law template of the LOI published on our website as an example, so that I can go into some topics in more detail.
Purpose of the letter of intent under Dutch law
What do you use an LOI for under Dutch law? The context and purpose of the LOI, or whatever name the instrument goes by, is mostly the same. The seller of a company has started discussions with a potential buyer about a merger or acquisition. In that process, the seller and potential buyer have often already exchanged some information on a reciprocal basis, for which they have entered into an NDA (for a similar read on our website about the Dutch template NDA, see here). If the initial discussions about a potential business acquisition are successful, buyer and seller want to know whether they are on the same page before seriously investing in a due diligence or drafting more detailed transaction documentation.
And that is exactly the reason for a buyer and a seller to first enter into a letter of intent.
What is an LOI? An LOI is an agreement that a seller and a potential buyer of a company conclude with each other in which they set out the basic principles for the intended M&A transaction without being legally committed to complete the intended transaction.
The Dutch law template of the LOI on our website briefly mentions the above-described context of the LOI in the recitals, to make clear why parties wish to enter into the LOI.
Heads of terms in Dutch law LOI
What do you include in an LOI under Dutch law? With a letter of intent, buyer and seller write down in general terms the outlines of the M&A transaction they intend to agree with each other. So it is about expressing intentions, without the LOI being directly legally binding to give effect to these intentions.
And this is extremely useful. A letter of intent encourages buyer and seller to become concrete at an early stage (before major investments have been made) on important issues, such as the purchase price, securities, due diligence, but without irreversible consequences for the parties.
In the Dutch law template LOI on our website, the main points for the proposed transaction are set out in article 3.1. This Dutch law template assumes a situation involving a sale under Dutch law of 100% of the shares of a private limited company. In this example LOI, the purchase price of the shares is equal to the enterprise value (cash/debt free) with offsetting deviations in working capital (as an illustration). Thus, a fairly common situation in M&A transactions under Dutch law.
In the LOI, the parties often agree on a process and a timeline, so they know what to expect from each other at what point (see Article 7 of the template LOI on pour website). A buyer also often stipulates a certain period during which exclusivity applies, so that the seller does not enter into discussions with other parties at the same time. We have included this in Article 8 of the template LOI we have published.
Is an LOI legally binding under Dutch law?
A letter of intent under Dutch law usually explicitly regulates that the buyer and seller (as long as the final purchase agreement has not yet been signed) are free to break off the negotiations about the merger or company takeover, and that in that case each party bears responsibility for its own costs incurred. This seems logical and needless to state, but if you do not explicitly regulate this, you might be disappointed of your matter is governed by Dutch law. According to Dutch case law, because of the principles of pre-contractual good faith, breaking off negotiations may under certain circumstances constitute grounds for the award of damages or reimbursement of costs.
And so you arrive at the apparent contradiction that parties are trying to resolve with an LOI under Dutch law. On the one hand, parties do not want a legally binding agreement on the merger or business acquisition itself; rather, parties want to retain the freedom to break off the purchase process or to renegotiate the intentions set out in the LOI. On the other hand, they do want legally binding agreements on, for example, (i) the right to break off negotiations free of charge, (ii) exclusivity during negotiations, (iii) confidentiality and (iv) the choice of Dutch law and court in the event of disputes.
In the Dutch law sample letter of intent on our website, you will therefore see in Article 1 exactly which articles in the LOI contain a description of non-binding intentions, and which agreements, on the contrary, are legally binding.
Mr Lukas Witsenburg is a Dutch corporate lawyer and partner at Penrose. For more information on Dutch corporate law, M&A and shareholder matters, please contact Mr Lukas Witsenburg (M&A lawyer), at l.witsenburg@penrose.law or tel: +31 6 15025194.
