Hashish companies usually use letters of intent (LOIs) to get agreed deal phrases in writing earlier than spending money and time negotiating the definitive written contract. LOIs is usually a large assist, particularly with a sophisticated deal. However they’re simple to botch, and might result in some fairly devastating penalties if not performed proper.
Watch out for unintended binding LOIs
Within the majority of conditions, events to an LOI need them to be totally or partially non-binding. These LOIs are meant solely to be outlines of a deal that the events can use in negotiating finer factors. Some provisions could find yourself being binding, like confidentiality or exclusivity provisions. However the majority of phrases are sometimes left to be fleshed out.
The issue is that some LOIs do a fairly unhealthy job of clarifying what’s and isn’t binding. This results in two fairly unhealthy potential outcomes. First, a provision meant to be binding may very well be construed as non-binding. Think about the customer in a deal wished the vendor locked in to an exclusivity obligation for 60 days after signing, however the LOI didn’t clearly specify that this was a binding obligation (versus just a few sort of expectation). It’s potential that the vendor might then store the deal round with none recourse on the customer’s half.
The second potential downside is probably lots worse – an LOI may very well be deemed binding the place it was meant to not be binding. I’ll get into this in better element within the subsequent half.
Binding LOIs is usually a large downside
Once in a while, folks need totally binding LOIs. In virtually all instances, I feel these are a nasty thought. As a result of binding LOIs are, by definition, binding, they need to include a LOT extra element than your common non-binding LOI which can be as brief as a web page or two. With extra element comes extra negotiation, and extra time. So usually, if events need a binding doc, it makes much more sense to only proceed to the definitive contract and never waste time on a binding LOI that may precede it.
As an apart, there are some restricted contexts the place a binding LOI is sensible regardless of these issues. For instance, think about a take care of plenty of completely different contracts to be drafted and executed at completely different occasions over a protracted time frame, however the place the events are however keen to spend a little bit of time up entrance negotiating phrases. In that case, it could make sense to have a binding LOI, or some sort of different binding settlement to flesh out these contractual obligations.
In any occasion, the place binding LOIs might be problematic is the place the negotiating events fail to incorporate enough element and mainly deal with them as binding variations of non-binding LOIs. And insufficiently detailed LOIs can result in a bunch of points. I’ve seen loads of conditions the place one celebration would have wished to incorporate extra protecting provisions in a full-length definitive, however the different celebration is aware of that the LOI is binding and refuses to barter anything. It may be a horrible final result.
LOI fundraisers
A number of companies will situation press releases after inking LOIs, for advertising and marketing functions but in addition to drum up investments – particularly so for public hashish firms. As you’ll be able to think about, there might be plenty of shenanigans right here as properly. Some hashish firms will enter into an enormous quantity of LOIs with little intent to consummate the transactions. That is clearly unhealthy information for his or her potential enterprise companion who could haven’t solely wasted money and time on getting the LOI performed, but in addition handed on different offers. And it could possibly result in much more issues for the corporate issuing the press launch in the event that they don’t signify the proposed deal’s context precisely.
There are some fairly simple options to those issues. For instance, even a non-binding time period sheet can include restrictions on publicity which can be binding (although cautious wording is required!). Or one or each events might carve out exclusivity obligations or enable for LOI termination within the occasion the opposite celebration isn’t taking the deal significantly or it turns into clear that the opposite facet is attempting to fundraise off the LOI.
Non-attorney drafted LOIs
Individuals suppose that as a result of LOIs aren’t binding and meant to function a top level view, legal professionals are pointless. The issue with this prepare of thought is that it may very well be extremely simple for non-lawyers to jot down an LOI that was meant to be non-binding, however fail to truly make it non-binding. Or they may draft an deliberately binding LOI that fails to incorporate enough element. Or they may make 100 different forms of errors that would have been averted.
As I wrote a number of years in the past, “Getting a lawyer concerned within the time period sheet course of might be key. That is very true on difficult or costly offers, or the place one celebration is aware of it has much less leverage in a deal to request modifications at a later date. It’s much more true the place the opposite facet or their legal professionals are going to be robust negotiators.”
To flesh that out a bit extra, as a deal define, the LOI would be the one of many key issues that legal professionals look to when negotiating a contract for the lifetime of the negotiation. I can’t inform you what number of occasions I’ve heard legal professionals complain that one thing was “not within the LOI” or “completely different from what’s within the LOI” throughout negotiations, even when the LOI was clearly not binding. And in plenty of instances, events will merely agree to stay to what the unique intent was.
All of that is to say that an LOI is an extremely essential funding. Good legal professionals don’t have to cost an arm and a leg on them, and an excellent LOI can save a ton of headache down the street. That is particularly the case in a extremely regulated trade the place one or each of the events to a deal could also be much less acquainted with regulatory intricacies when negotiating the LOI.