Letter of Intent (LoI)

Important course-setting before the M&A deal in Germany

Before every german company acquisition (M&A transaction), audits of the buyer and purchase price negotiations take place to a greater or lesser extent. In the german process, the working relationship between seller and buyer intensifies over a longer period of time. The longer the process lasts, the more information is exchanged. The Letter of Intent (LoI) has a key function here.

As a german business and tax law firm with a team of experienced certified specialists for german corporate and tax law, we accompany your M&A transaction through all phases.

For a non-binding inquiry, please contact one of our experts directly by phone or e-mail or use the contact form at the bottom of this page.

First contact in german practice

During the first contact, the seller discloses a few information about his company and the buyer responds with more or less concrete purchase offers. The first contact in Germany can be made directly or through a broker. Often, an information memorandum is sent in which very general information about the target company is disclosed. In larger transactions, this task is often performed by a german investment bank.

Letter of Intent in german law

In german practice, the buyer's offer will typically only be an indicative offer in the form of a Letter of Intent, i.e. an offer which is subject to satisfactory due diligence. Occasionally, this document is also called a term sheet.

In Germany, the function of the Letter of Intent is to gain clarity as early as possible about the buyer's core ideas about the deal. Typical contents of a LoI are the exact description of the object of purchase, derivation of the purchase price and a timeline for the further transaction process.

The Letter of Intent is generally not a legally binding document under german law. However, it has a not insignificant psychological effect, since the party wishing to deviate from the key points of a Letter of Intent may find himself in argumentation difficulties. Against this background, it is obvious that a letter of intent should be formulated very carefully.

Joint letter of intent - joint declaration of intent in german M&A practice

If the seller countersigns the letter of intent, a joint letter of intent, sometimes called a memorandum of understanding (MoU), is created. By countersigning the LoI, the signatory indicates that it is basically prepared to conclude the transaction on the economic and legal terms outlined therein. It cannot be warned strongly enough that the seller should not countersign an LoI prematurely, as this may cause him to commit himself - at least in terms of the psychology of negotiation - to provisions that may be disadvantageous. Against this background, it is strongly advisable not to sign an LoI prematurely without prior legal advice in Germany.

From the buyer's point of view, it is recommended that an exclusivity agreement be included in german practice. This means that the seller undertakes to negotiate exclusively with the buyer for a certain period of time, i.e. not to conduct parallel negotiations with third parties. With regard to the transaction costs incurred (especially consultancy costs in the course of due diligence), it is often agreed that each side will bear its own costs, even in the event that the deal does not materialize. Occasionally, however, the buyer agrees to bear a certain amount of the seller's transaction costs in return for the exclusivity granted in Germany.

Compensation in the event of a breakdown in negotiations under german law?

If negotiations are broken off despite the conclusion of a mutual declaration of intent, neither the seller nor the buyer is entitled to damages in german practice. The situation is different if a so-called break-up clause has been expressly agreed, i.e. a kind of lump-sum compensation for costs, if, for example, the seller grants the buyer exclusivity for several weeks, i.e. waives other market opportunities, and the buyer nevertheless does not complete the transaction. In this case, the seller in Germany wants to be indemnified by a break-up-fee, at least as far as the frustrated advisor costs are concerned.

The role of our english-speaking german M&A lawyers as deal advisors in the preparation of the contract  

The team of ROSE & PARTNER, with offices in Hamburg, Berlin, Munich, Frankfurt and Cologne, consists of lawyers, tax advisors, certified specialists for german corporate law and tax law, who comprehensively advise founding shareholders, investors, members of the management and advisory board as well as participating employees on german corporate and tax law.

Our advisors have worked in leading law firms and/or in-house M&A departments and are familiar with the customs of the national and international M&A business. We are available in the early stages of a transaction, in particular for the following activities:

  1. Definition of a transaction strategy
  2. Preparation of a data room
  3. Preparation of a due diligence questionnaire
  4. Pre-contractual negotiations for seller and buyer side
  5. Drafting, review and negotiation of LoI and term sheets
  6. Execution of the due diligence

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