Serial article regarding M&A on NNA (vol.109)

In this article, we take a look at Letter of Intents.  

In M&A deals, Letter of Intent is a written statement by a buyer or an investor to a seller or a target company to show its intention to acquire or investment. And it is often referred by the acronym LOI. 

1. Submission process of LOI 

To submit LOI, we generally follow the process as bellow. 

  1. Submit summary documents called “Teaser” from FA on sell side to an investor. 
  1. Sign Non-Disclosure Agreement (NDA) by both parties if the investor wants to consider further. 
  1. Submit detailed documents called Information Memorandum (IM) or Information Package (IP) from the seller to the investor. 
  1. Submit additional documents, conduct FAQ or site visit if needed. 
  1. Submit LOI from the investor to the seller. 

2. Contents of LOI 

In M&A deals, the following information is generally included in LOI. 

  1. Identification of parties and the target company to be invested or acquired. 
  1. Intention of acquisition or investment. 
  1. Purpose of acquisition or investment, and future plans. 
  1. Price of acquisition or investment, calculation method, whether the liabilities of the target company will be taken over or not. 
  1. Scheme of acquisition or investment (Whether to transfer shares or businesses, or whether to take over 100% or partially). 
  1. Timeline of acquisition or investment (Schedule of DD, documentation and the closing etc.). 
  1. Whether to conduct DD or not. 
  1. Treatment of the target company’s employees. 
  1. Retention, which means the intention of the target company’s management to be retained. 
  1. Source of capital for investment or acquisition. 
  1. Intention of exclusivity for negotiation right. 
  1. Whether this LOI is legally binding or not. 
  1. Expiry date of LOI 
  1. Any special conditions such as joint guarantee, deposit etc. 
  1. Others (e.g., confidentiality, governing laws, jurisdiction etc.) 

3. Identification of a target company

It depends on the scheme, but M&A usually includes three parties: a seller, a buyer and a target company. In the case of share transfer, the seller and the buyer are the parties, and the shares of the target company is the object of the transaction. Since multiple entities may be proposed to be the sales target by the seller, we need to identify which entity the buyer is going to invest or acquire. 

We also need to specify which entity is going to provide fund and investment so that the seller can make credit analysis of the funder. Especially in the case of cross border M&A, when the buyer is a listed company, we can access to financial information, however, when the buyer is unlisted company, it is common that it’s difficult to get credit information of that party.

For that reason, if an unlisted company is going to be the funder or the investor, the seller shall choose financially credible company as the buy-side entity of the M&A transaction. And if the buyer is a newly incorporated company, it is advisable to get some assurance such as joint guarantee by the parent company or financially credible individual. Therefore, identifying who is going to be the investor or buyer in LOI is crucial for the seller. 

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