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Letter of Intent
A letter of intent or LOI is a document outlining an agreement between two or more parties before the agreement is finalized. The concept is similar to the so-called heads of agreement. Such agreements may be Asset Purchase Agreements, Share Purchase Agreements, Joint-Venture Agreements and overall all Agreements which aim at closing a financially rather large deal.
LOIs resemble written contracts, but are usually not binding upon the parties in their entirety. Many LOIs, however, contain provisions that are binding, such as non-disclosure agreements, a covenant to negotiate in good faith, or a "stand-still" or "no-shop" provision promising exclusive rights to negotiate. A LOI may also be interpreted as binding the parties if it too closely resembles a formal contract.
The purposes of an LOI may be:
- to clarify the key points of a complex transaction for the convenience of the parties
- to declare officially that the parties are currently negotiating, as in a merger or joint venture proposal
- to provide safeguards in case a deal collapses during negotiation
A LOI may also be referred to as a memorandum of understanding (MOU), term sheet or discussion sheet. Although the terms refer to different documents, the differences are often formal in nature, reflecting different drafting styles or business customs, not a substantive difference in what these various documents accomplish.