Non-Binding
Agreements

DEFINITION

A non-binding agreement is an arrangement to do something, or refrain from doing something, that lacks enforceability.

NON-BINDING AGREEMENTS IN M&A

Non-binding agreements are useful to level-set and confirm that building blocks for mutual understanding exist. They often provide the foundation for a business deal—and future contract.

In mergers and acquisitions, non-binding agreements are most commonly encountered in letters of intent and indications of interest.

Because LOIs and IOIs are sent by prospective buyers to potential sellers prior to full negotiations and the completion of due diligence, buyers do not bind themselves to key deal terms frequently outlined in their initial proposals, like: (i) headline purchase price, (ii) transaction structures, (iii) anticipated closing conditions, and (iv) post-closing remedies (e.g., indemnification packages). Those aspects of a transaction are only agreed to in binding, definitive transaction documents.

Non-binding agreements are also relevant when sellers organize competitive auctions for sales of target businesses. There, sellers will prepare non-binding process letters outlining, at a minimum, deadlines by which offers must be received.

Process letters may also indicate preferred transaction structures and stipulate the exact requirements for responsive bids.

In some auction processes, sellers provide drafts of key transaction documents—like purchase agreements—and require potential buyers to submit comments to these drafts as part of their bid packages.

PITFALLS

The following are frequent issues that arise at the bid-submission and auction-process stages:

• MISSING EXPIRATION DATES

Offers can be accepted for so long as they remain outstanding. When making an offer, it is important to specify an expiration date and time so the offer cannot be unexpectedly accepted in the future. (An offeror should not be haunted by offers made, but not accepted.) Well-drafted LOIs and IOIs include deadlines by which they must be accepted or else they expire.

• COMMINGLED TERMS

It is sometimes desirable for an agreement to contain a mix of legally binding and non-binding terms. This is often the case in LOIs and IOIs where an exclusivity provision is included that commits a seller to a buyer for a period of time. If not properly drafted, exclusivity provisions appearing in otherwise non-binding proposals will not be binding, leaving the seller free to pursue and entertain other bids as the potential buyer spends considerable time, money, and other resources attempting to negotiate a definitive deal.

• AUCTION DRAFT AMBIGUITY

If auction drafts are part of the bidding process, the drafts should include clear disclaimers that they will not create binding agreements until placed in definitive form and signed by all parties. These disclaimers should only be removed once the parties are prepared to sign.