The letter of intent in the context of M&A transactions in Spain

Mergers and acquisitions, especially in the purchase or sale of shares or shares of a company, include a letter of intent, also known as a term sheet or LOT. It is customary for contracting parties to agree to a letter of intent at the beginning of the operation. Although it lacks binding character, its main purpose is to document the willingness of the parties to carry out, in the near future, a certain operation or legal business together, as according to a series of basic conditions.

Although it is a document that, as we have highlighted, does not usually generate binding links between the parties, the letter of intent constitutes a true declaration of will that serves as a roadmap to the contracting parties in the beginning of the particular operation. It also has a high ethical value for them.

The letter of intent is not regulated in a specific way in the Spanish legal system. Therefore, the principle of the autonomy of will governs, enabling the contracting parties to include the content that they deem appropriate. Notwithstanding the above, the clauses most common in this type of document are the following:

Main clauses of the letter of intent

• Fixation of the minimum terms of the future operation (structure of the operation, initial purchase price, payment method, shares or units that are acquired, estimated time to carry out the operation, etc.)
• Obligation of exclusivity in the negotiations in favour of the buyer
• Confidentiality
• Conducting a legal audit process or due diligence, among others

In short, the letter of intent is a document whose purpose is to lay the foundation for the start of a mergers and acquisitions operation, as a starting point for the negotiating phase between the parties. Generally, it does not constitute a binding offer or contract, but rather an ethic compromise between parties created in the beginning with the intention of continuing negotiations in good faith, with the goals of completing an operation in the near future, according to minimum terms.

Its main value lies in providing certain judicial security to the parties in the sense that a document of minimum understanding and commitment to future conduct is written in good faith. This limits the risks to which the parties would be exposed to in the event of an open negation without any formality.

Finally, it should be noted that, despite the non-binding nature of the letter of intent, the parties are, in any case, subject to the general principle of good faith. For this reason, the unjustified rupture of negotiations or preliminary agreements between the signing parties of the letter of intent could face a certain responsibility in contrahendo, with the consequent obligation of incurring the damages and losses caused.

If you want more information regarding the letter of intention, do not hesitate to contact Mariscal & Abogados, your trusted legal advisors in Spain.

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