What is the role that consultants must play in the definition of the Letter of Intent?

By Eugenio Micheletti* for staffingamericalatina

We were in a hotel lounge, gathered with the lawyers of both parties, and studying the contents of a letter of intent (LOI) for an acquisition process in Chile. The legal advisors were heatedly discussing some of the clauses to be included in the LOI, when we received a call from the representatives of the selling and the purchasing parties, asking us to gather with them.

Mr. Jack looked firmly at Mrs. Danika and said “I am the Buyer”, to what she answered “and I am the Seller”. From that moment on, the lawyers (and the broker) looked for feasible options for every matter, aiming at moving forward with the process.

Clearly, when those who make the decisions are willing to advance with a business, collaborators can always find proper alternatives to make this happen. However, this role can also be played by the professionals involved in the process. Collaborators can (and must) make “things happen”.

The main goal of the Letter of Intention is to accurately define the critical aspects of a possible transaction. In other words, it cannot be ambiguous regarding the definitions, and it cannot delve into an analysis of every aspect to be defined in a Share Purchase Agreement (or any other instrument used to formalize the agreement). The LOI is a necessary formality that is developed after a first approach. It is an important tool to make the negotiations more down to earth, and move on to the next phase of Due Diligence and the negotiation of the particular clauses of the final agreement.

Depending on the market where you are operating, the LOI has different levels of precision regarding the agreements the parties must reach in order to move on with the process. Both, the legal advisors and the M&A consultant are familiar with this, and they must all collaborate to define the reach of the LOI, so it does not become an end on itself. Particular matters, which are not essential, are put aside, and intentions are reflected.

Everything to be negotiated “if the due diligence goes well”, must wait for the results of the latter.

Needless to say that, should unacceptable demands emerge from one party to the other, it would be wise to state them at this point. It is always healthier and more efficient to do this so that, if it is not possible to agree, the process ends as quickly as possible. This situation must be detected by the consultant broker, who shall be analyzing the expectations and trying to lead them towards a negotiation area. However, this does not mean that we should speed up the negotiation periods of the particular clauses of a final agreement.

Clearly, the role of the legal advisors and that of the broker must be differentiated. Lawyers work for a party, and they usually work to protect the interests of their clients, which makes them suggest conditions that leave the other party in a “disadvantageous” position. M&A consultants work to generate situations that are fairer for both parties, preventing economic, partnership or any kind of damage for either of them.

Conclusions

When decisions makers in both parties are willing to move forward in a buying and selling operation, the M&A consultant and the legal advisors must work together in the development of the LOI’s content. The reasons that may lead to failure are linked to differences in terms of expectations, the occurrence of hidden situations or serious circumstances, but not with the layout of the declaration of “intents”, which must be simple and concise.

*Eugenio Micheletti is the Director of Emerging Staffing Brokers

emicheletti@emergingsb.com