LoI: UTILITY, RISKS, AND INSIGHTS FROM THE COURT’S PRACTICE

by Teodora KOLETSIS, Partner, and Florin DOGARU, Senior Associate

The Letter of Intent (LoI) is an important step in various transactions in Romania, whether for taking over a company, sale of strategic assets or trade fund, negotiation of a shareholders’ agreement or setting up a joint-venture. Although not explicitly regulated under the Civil Code or the Companies’ law no. 31/1990, the LoI is enforceable.

The practice of courts, including the precedent developed before the High Court of Cassation and Justice as a result of litigations handled by our law firm, shows that the LoI is not a mere formal document, but a tool potentially giving rise to contractual and financial liability.

What is a LoI?

LoI is a legal tool often used as pre-contractual document under which the parties agree on the general terms of a transaction, depending on its scope: terms and conditions for the closing, the assessment method (for example, by applying an adjusted EBITDA multiple), the indicative price, other important clauses (non-disclosure, exclusivity), terms for withdrawal from the negotiations etc. 

This document is usually signed following the preliminary talks, but prior to the due diligence stage and the drafting of the final contract.

In the business environment, the LoI provides a working framework justified by the complexity of the transaction considered or even its implications on the market, the legal status of the assets, the internal decision-making process or the requirement to get approval from the competent bodies (Competition Council, CEISD etc.).

Legal value of the LoI

The LoI is generally seen by the business environment as having one function: a pre-contractual document setting up the general framework of the negotiations between the parties. With this perspective in mind, in many cases, the risks potentially associated to entering into a LoI are not correctly assessed, for the parties exclude from the very beginning the likelihood of being held liable under a document that they do not deem able to produce significant legal effects.

Or, what one should bear in mind is that the legal effects of a legal deed are not determined solely by its name, but by the actual content of its clauses. Thus, based on the principle of the contractual freedom, enshrined by the provisions of the article 1169 of the Civil code – expression of private autonomy – legal and natural persons are free to self-govern and enter into agreements that they themselves establish, within the limits set out by the law, the public order and good morals.

This is exactly why, since the LoI, as we have shown, is not subject to specific regulation, it falls to the parties to establish, under the clauses agreed, the content of such pre-contractual document and, implicitly, the legal effects it may produce. In practice, we can find many types of LoI, depending on the particularities of each transaction, as following:

• non-binding, if it is a mere expression of the parties’ wish to pursue negotiations;
• partially binding, when there are clauses, such as non-disclosure or exclusivity clauses, clearly stated;
• legally binding when the wording and the language go beyond intention and they, therefore, turn into real contractual obligations which failure may result in rights to compensation.

Although this last-listed type of LoI - the legally binding LoI - is not very well known nor is its legal force fully grasped by both legal and natural persons, its existence is real and recognized by the case law of the supreme court.

A significant example proving that the letter of intent can also give rise to other specific obligations, in addition to the negotiation obligations, is the litigation won also before the High Court of Cassation and Justice by the lawyers of GRUIA DUFAUT & ASOCIATII. In that case, an important Romanian sugar manufacturer sued the potential buyer who groundlessly refused to pursue the purchase of the assets, despite having signed a letter of intent stipulating an exclusivity clause. The high court validated the position of Gruia Dufaut & Asociatii and held that, in consideration of the wording of its clauses, the LoI qualified as an unnamed contract, of real and mixed nature, giving rise to rights and obligations for its signatories. Considering these aspects, the high court, enforcing the contractual clauses agreed by the parties, sanctioned the potential buyer for having abusively and unexpectedly terminated the negotiations for the purchase of the assets, by obliging the potential buyer to pay over EUR 4 million in compensation to the clients of our firm.

Risks and practical recommendations

Although a useful tool, the LoI also hides a series of risks which must be considered:

• an ambiguous wording can result in disputes that can prove time-consuming and are open to the courts’ interpretation;
• too detailed clauses can turn the intention to negotiate in view of contracting into a binding commitment having the legal force of a contract;
• the exclusivity clause can be used by the potential buyer to entice away other buyers.

On the other hand, from a buyer’s perspective it should be analysed whether the exclusivity period is reasonable or can be used by the seller to speed up the negotiation process.

To limit such risks, it is essential that the wording of the clauses and be plain and clear and that adequate legal mechanisms be identified to prevent potential abuse.

Therefore, the LoI should provide, plainly and clearly, the parties’ intention, the structure of the transaction, the scope, the indicative price or how it will be estimated, payment terms, potential conditions precedent or conditions (audits, clearances or permits etc.).

Also, depending on the parties’ intentions, it is recommendable to include a clause explicitly stipulating the non-binding nature of the deed, except for the clauses explicitly stated as binding (non-disclosure, exclusivity), which survive the termination of the LoI.

As a conclusion, it is important to understand that the letter of intent is not only a gentleman’s agreement. In Romania, the LoI earned its place as working tool in the negotiations, but, as we showed, it can have significant legal consequences.

Therefore, prudence and careful wording remain essential. For both investors and entrepreneurs, getting legal counsel prior to signing an LoI is not additional cost, but investment meant to avoid subsequent litigation.