Letter of Intent
let-er ov in-tent
Learn what a letter of intent (LOI) is, how it is used in Irish business transactions, and which parts are typically binding and non-binding.
Learn what a letter of intent (LOI) is, how it is used in Irish business transactions, and which parts are typically binding and non-binding.
A Letter of Intent (LOI) is a document that sets out the proposed terms of a business transaction before a formal, binding agreement is signed. In the Irish market, it is used across fundraising rounds, acquisitions, commercial partnerships, and property deals. It signals serious intent and creates a shared framework for negotiation, without either party committing fully to the final outcome.
For founders, the LOI is often the first formal document exchanged with an investor or acquirer. It captures headline terms such as the proposed valuation, deal structure, key conditions, and timeline. Think of it as a term sheet in narrative form, setting out where both parties are headed and what they need to agree on before the detailed legal drafting begins.
The commercial terms of the proposed transaction sit at the heart of any LOI. These will typically cover the purchase price or investment agreement parameters, the proposed deal structure, and any adjustments to be made based on due diligence findings. The document will also set out who is responsible for costs if the deal does not complete and what happens if either party withdraws.
An exclusivity or lock-out clause is common in Irish LOIs, particularly in investment and acquisition scenarios. This prevents the seller or founder from negotiating with third parties for a defined period, giving the investor time to complete their review. The length of this period is negotiable and should reflect the genuine requirements of the process rather than an open-ended hold on your options.
Confidentiality provisions are frequently included as binding clauses within an otherwise non-binding LOI. These complement, but do not replace, a standalone confidentiality agreement, which should already be in place before commercially sensitive information is disclosed. Where an LOI touches on conditions precedent, these must be clearly defined to avoid any ambiguity about when the deal can legally proceed.
Understanding the distinction between binding and non-binding provisions is one of the most important aspects of reviewing any LOI. The general commercial terms, such as valuation and ownership structure, are typically expressed as non-binding. They represent an agreement in principle, meaning either party can walk away if negotiations break down without facing a legal claim for breach of contract.
However, certain specific clauses are routinely drafted as legally binding. These include the exclusivity period, confidentiality obligations, and provisions governing the conduct of due diligence. Governing law and arbitration clauses are also generally enforceable, ensuring that any dispute about the LOI itself can be resolved through a defined process. Irish courts will examine the precise language used to determine whether binding obligations have been created.
The key risk for founders is signing an LOI without understanding which parts create genuine obligations. A binding exclusivity clause can significantly limit your freedom of action for weeks or months. Taking legal advice before signing protects your negotiating position and ensures you are not inadvertently locked into commitments you had not intended to make.
In a fundraising context, the LOI typically precedes the full investment agreement. Once signed, the investor proceeds with due diligence, examining the company's financial records, legal structure, and commercial position. The LOI sets the parameters for this process, including what information will be shared and how long the investor has to complete their review.
The terms agreed in the LOI form the commercial basis for the final binding documents. Whilst they are subject to refinement, founders should treat an LOI seriously. A valuation or ownership structure agreed at this stage creates an expectation that is difficult to move away from without good reason. The memorandum and articles of association will ultimately need to reflect any new share arrangements agreed during this process.
Where a transaction involves debt rather than equity, a loan agreement will follow the LOI rather than an investment agreement. In either case, the LOI serves the same purpose: establishing agreed commercial terms in writing before either party incurs the cost of detailed legal drafting.
Exclusivity periods deserve careful attention. Agreeing to an overly long exclusivity clause hands the investor significant leverage. If they know you cannot negotiate with others, there is less pressure on them to move quickly or maintain their initial offer. Negotiate the length of any exclusivity period to match what is genuinely needed for due diligence, typically four to eight weeks for an early-stage round.
Break fee or cost reimbursement clauses can appear in some LOIs, particularly in larger transactions. These require one party to pay the other's legal or advisory costs if the deal falls through for specified reasons. Founders should understand any such obligations clearly before signing, as they can create real financial exposure in a failed deal.
Finally, pay close attention to the conditions precedent within the LOI. These are the requirements that must be satisfied before the deal can proceed to completion. They might include obtaining shareholder consent, receiving regulatory approval, or completing satisfactory due diligence. Ensure that any conditions you are committing to meet are realistic and within your control before you agree to them.
