LOI and NDA in a company acquisition: getting the letter of intent and confidentiality right

Before a prospective buyer gains insight into financial figures, contracts and technical know-how, a confidentiality agreement should be signed. It obliges the other side to use the disclosed information only to review the transaction and not to pass it on to third parties. For the seller it is the most important protection, because trade secrets once revealed cannot be retrieved.

A robust confidentiality agreement governs more than mere secrecy. It determines the purpose of disclosure, the circle of persons authorised to access the data, the duration of the duty and the return or deletion of the documents after a break-off. A contractual penalty is often agreed, because the actual damage from a breach is hard to prove. Our focus page on due diligence offers more depth.

A non-solicitation clause is also sensible. It prohibits the other side from poaching key staff of the target company during and after the review. The concept of the confidentiality agreement we explain in more depth in the glossary.

The letter of intent, often called a term sheet, records the status of the negotiation reached. It describes the planned deal in broad terms: the object of purchase, a price expectation or range, the planned process and the timetable. As a rule it is not yet meant to create a duty to conclude the purchase contract.

Decisive is the clean separation between binding and non-binding parts. Usually the actual purchase obligation remains non-binding, because the outcome of due diligence is still open. Binding, by contrast, are often confidentiality, an exclusivity for a certain period, the bearing of each party own costs and the agreement on governing law and jurisdiction. This separation should be expressly stated in the text.

The letter of intent also steers the further process. It can set out which steps follow up to the purchase contract, such as due diligence, the drafting of the warranty catalogue and the negotiation of the conditions to completion. How these steps connect is shown in the post on the due diligence checklist.

Even a letter of intent meant to be non-binding is not without legal effect. In Austria, the mere taking up of contract negotiations can create a pre-contractual obligation. Whoever breaks off negotiations without good cause after having raised a legitimate reliance on conclusion in the other party may be liable for the reliance damage under the principles of culpa in contrahendo.

The choice of words in the letter of intent is therefore important. Wording that suggests a firm agreement can strengthen the binding effect, even if that was not intended at all. An express clarification that the purchase obligation only arises with signing of the purchase contract creates clarity here.

Conversely, the deliberately binding clauses should actually be enforceable. An exclusivity without a clear duration or a non-solicitation clause without a contractual penalty loses value in practice. The concept of pre-contractual liability we explain in the glossary on culpa in contrahendo.

Seller and buyer pursue opposing aims in this phase. The seller wants to protect its information, commit as little as possible and keep the exclusivity short. The buyer wants a reliable framework, an exclusivity long enough for due diligence and a letter of intent that orders the timetable up to completion.

A balanced text takes account of both interests. For the seller the scope of confidentiality, the non-solicitation clause and a measured exclusivity are central. For the buyer it matters that the letter of intent secures the course of the review without already obliging it to buy. Anyone on the seller side will find further guidance in the post on vendor due diligence.

In any case it is worth thinking of both documents together. The confidentiality agreement and the letter of intent interlock and together form the entry into the transaction. An initial assessment of the risks is provided by our M&A transaction risk profile.