• By Daniel ORGUÉ
• 09-06-2017

Letters of Intent: regulating the negotiation process in Spain

In mercantile transactions of a certain relevance, it is usually seen -as much as highly recommended- that, prior to the beginning of the negotiation period, the stakeholders propose signing a Letter of Intent (also known as LOI) since they are precisely adopted to provide stakeholders with legal certainty throughout the whole negotiating process. with the purpose.

The most usual scenario is when Letters of Intent are proposed when first meetings take place, with the purpose of a business sale agreement or a merge. This is because LOI set forth many rights and duties binding both parties, such as non-disclosure or the right to information, and this transparency in the information on these LOI Usually when the first conversations, that must be respected throughout the negotiating period.

Their content

Letters of Intent are optional and not regulated under the Spanish law, which means that its content can be freely agreed by the parties involved. However, the following clauses are frequently included on this type of document:

Clause of Exclusivity, no competence, non-disclosure agreements, right to information, duration, good faith in negotiations, and logically, how the “Due Diligence” is going to be carried out, as it is the key, essential element throughout all the negotiation process.

The effects:

In addition, in Spain, in some cases a Penalty Clause is specifically included in the event that one of the parties decides to withdraw from the operation. In my opinion as lawyer, the nature of Letter of Intents is to regulate the negotiation process, so it is not neither a binding offer nor a pre-contract. Therefore, establishing a Penalty Clause in this instrument is, from our point of view, beyond its scope.

However, something different would be including compensation for damages caused if one of the parties fails to comply with any of the obligations that have been submitted in the Letter of Intent and that relate to the negotiating process itself.

Imagine the following assumption: a potential buyer breaches their duty of confidentiality, and competitors get the result of Due Diligence. This could have a significant negative impact at all levels, including a criminal offense, and we believe that in these cases it is appropriate to establish minimum consequences for the defaulting party.

In conclusion:

The Letter of Intents (LOI) is an improved and valid contract by which the parties voluntarily establish the rights and obligations of the negotiation phase to achieve an operation in the commercial sphere, and these rights and obligations are fully enforceable by all  the parties.

Notwithstanding this, the parties may add the content they deem appropriate, including a penalty clause, so that such documents should not be taken lightly.